Emeritus 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-Q

________________________________

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT 1934

For the quarterly period ended September 30, 2012

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
	THE SECURITIES EXCHANGE ACT OF 1934

Commission file number   1-14012

EMERITUS CORPORATION

(Exact name of registrant as specified in its charter)

WASHINGTON	91-1605464
(State or other jurisdiction	(I.R.S Employer
of incorporation or organization)	Identification No.)

3131 Elliott Avenue, Suite 500, Seattle, WA 98121

(Address of principal executive offices)

(206) 298-2909

(Registrant’s telephone number, including area code)

____________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesþNoo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesþNoo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated fileroAccelerated filerþNon-accelerated fileroSmaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesoNoþ

As of October 26, 2012, 45,139,467 shares of the Registrant’s Common Stock were outstanding.

EMERITUS CORPORATION
Table of Contents
Part I.  Financial Information
			Page No.
Item 1.  Financial Statements (unaudited):			1
		Condensed Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	2
		Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011	3
		Condensed Consolidated Statements of Comprehensive Loss for the three and nine months ended September 30, 2012 and 2011	4
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2012 and 2011	5
		Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		45
Item 4.	Controls and Procedures		45
Part II.  Other Information
Note:	Items 2, 3, 4, and 5 of Part II have been omitted because they are not applicable.
Item 1.	Legal Proceedings			46
Item 1A.	Risk Factors			46
Item 6.	Exhibits			46
	Signature			47
	Index to Exhibits			48

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PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements (unaudited)

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EMERITUS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 (In thousands, except share data)

ASSETS
	September 30,			December 31,
	2012			2011
Current Assets:
Cash and cash equivalents	$	97,353		$	43,670
Short-term investments		4,668			3,585
Trade accounts receivable, net of allowance of $4,269 and $2,294		24,883			26,195
Other receivables		22,401			16,117
Tax, insurance, and maintenance escrows		25,321			20,501
Prepaid insurance expense		31,357			36,020
Deferred tax asset		20,708			19,934
Other prepaid expenses and current assets		7,467			8,140
Total current assets		234,158			174,162
Investments in unconsolidated joint ventures		14,819			15,428
Property and equipment, net of accumulated depreciation of $494,221 and $407,952		2,278,095			2,355,425
Restricted deposits		18,619			16,427
Goodwill		118,232			118,725
Other intangible assets, net of accumulated amortization of $60,617 and $48,722		87,319			100,873
Other assets, net		25,765			29,288
Total assets	$	2,777,007		$	2,810,328
LIABILITIES, SHAREHOLDERS' EQUITY AND NONCONTROLLING INTEREST
Current Liabilities:
Current portion of long-term debt	$	57,586		$	74,175
Current portion of capital lease and financing obligations		23,348			17,004
Trade accounts payable		22,569			7,959
Accrued employee compensation and benefits		79,234			70,936
Accrued interest		8,046			9,061
Accrued real estate taxes		16,196			11,791
Accrued professional and general liability		41,323			24,525
Other accrued expenses		23,875			19,477
Deferred revenue		14,760			16,348
Unearned rental income		19,288			22,965
Total current liabilities		306,225			274,241
Long-term debt obligations, less current portion		1,509,763			1,528,710
Capital lease and financing obligations, less current portion		617,743			619,088
Deferred gain on sale of communities		4,007			4,789
Deferred straight-line rent		63,361			61,481
Other long-term liabilities		40,787			39,283
Total liabilities		2,541,886			2,527,592
Commitments and contingencies
Shareholders' Equity and Noncontrolling Interest:
Preferred stock, $0.0001 par value.  Authorized 20,000,000 shares, none issued		–			–
Common stock, $0.0001 par value.  Authorized 100,000,000 shares, issued and
outstanding 45,137,207 and 44,989,861 shares		4			4
Additional paid-in capital		832,280			822,345
Accumulated deficit		(600,601	)		(543,249	)
Total Emeritus Corporation shareholders' equity		231,683			279,100
Noncontrolling interest-related party		3,438			3,636
Total shareholders' equity		235,121			282,736
Total liabilities, shareholders' equity, and noncontrolling interest	$	2,777,007		$	2,810,328

See accompanying Notes to Condensed Consolidated Financial Statements

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EMERITUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(In thousands, except per share data)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Revenues:
Community revenue	$	323,874		$	318,237		$	960,425		$	914,679
Management fees		5,293			5,000			15,490			15,946
Reimbursed costs incurred on behalf of managed communities		51,953			51,020			154,598			165,623
Total operating revenues		381,120			374,257			1,130,513			1,096,248
Expenses:
Community operations (exclusive of depreciation and amortization
and community leases shown separately below)		216,943			223,423			643,987			627,812
General and administrative		23,082			21,671			69,492			66,605
Transaction costs		1,292			492			2,480			9,085
Impairments of long-lived assets		–			–			2,135			–
Depreciation and amortization		32,461			32,540			98,024			90,065
Community leases		30,960			31,014			93,147			93,212
Costs incurred on behalf of managed communities		51,953			51,020			154,598			165,623
Total operating expenses		356,691			360,160			1,063,863			1,052,402
Operating income from continuing operations		24,429			14,097			66,650			43,846
Other income (expense):
Interest income		101			121			303			355
Interest expense		(38,451	)		(41,605	)		(116,083	)		(115,844	)
Change in fair value of derivative financial instruments		(174	)		1,527			(919	)		2,036
Net equity losses for unconsolidated joint ventures		(28	)		(817	)		(500	)		(1,252	)
Acquisition gain		–			–			–			42,110
Other, net		743			312			1,624			2,774
Net other expense		(37,809	)		(40,462	)		(115,575	)		(69,821	)
Loss from continuing operations before income taxes		(13,380	)		(26,365	)		(48,925	)		(25,975	)
Provision for income taxes		(324	)		(82	)		(920	)		(657	)
Loss from continuing operations		(13,704	)		(26,447	)		(49,845	)		(26,632	)
Loss from discontinued operations		(2,698	)		(17,258	)		(7,705	)		(17,655	)
Net loss		(16,402	)		(43,705	)		(57,550	)		(44,287	)
Net loss attributable to the noncontrolling interests		150			97			198			315
Net loss attributable to Emeritus Corporation
common shareholders	$	(16,252	)	$	(43,608	)	$	(57,352	)	$	(43,972	)
Basic and diluted loss per common share attributable to
Emeritus Corporation common shareholders:
Continuing operations	$	(0.30	)	$	(0.59	)	$	(1.12	)	$	(0.59	)
Discontinued operations		(0.06	)		(0.39	)		(0.17	)		(0.40	)
	$	(0.36	)	$	(0.98	)	$	(1.29	)	$	(0.99	)
Weighted average common shares outstanding		44,642			44,316			44,612			44,270

See accompanying Notes to Condensed Consolidated Financial Statements

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EMERITUS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
(In thousands)
	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net loss	$	(16,402	)	$	(43,705	)	$	(57,550	)	$	(44,287	)
Other comprehensive loss net of tax:
Realized gain on sale of investment securities		–			(1,569	)		–			(1,569	)
Unrealized holding gains on
available-for-sale investment securities		–			97			–			97
Other comprehensive loss net of tax:		–			(1,472	)		–			(1,472	)
Comprehensive loss		(16,402	)		(45,177	)		(57,550	)		(45,759	)
Comprehensive loss attributable to the noncontrolling interests		150			97			198			315
Comprehensive loss attributable to Emeritus Corporation
common shareholders	$	(16,252	)	$	(45,080	)	$	(57,352	)	$	(45,444	)

See accompanying Notes to Condensed Consolidated Financial Statements

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EMERITUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(In thousands)

	Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(57,550	)	$	(44,287	)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization		98,024			90,065
Amortization of above/below market rents		4,990			5,778
Amortization of deferred gains		(782	)		(851	)
Acquisition gain		–			(42,110	)
Loss on early extinguishment of debt		813			–
Impairments of long-lived assets		8,430			17,497
Gain on sale of investments		–			(1,569	)
Net loss on sale of assets		527			119
Amortization of loan fees		2,465			2,280
Allowance for doubtful receivables		7,883			5,839
Equity investment losses		500			1,252
Stock-based compensation		8,319			6,882
Change in fair value of derivative financial instruments		919			(2,036	)
Deferred straight-line rent		3,221			7,129
Deferred revenue		(755	)		2,285
Other		1,877			5,248
Change in other operating assets and liabilities		31,740			10,232
Net cash provided by operating activities		110,621			63,753
Cash flows from investing activities:
Acquisition of property and equipment		(21,621	)		(23,114	)
Community acquisitions, net of cash acquired		–			(180,229	)
Proceeds from the sale of assets		15,565			16,339
Other assets		(376	)		213
Advances from (to) affiliates and other managed communities, net		814			(1,697	)
Distributions from unconsolidated joint ventures, net		173			2,680
Net cash used in investing activities		(5,445	)		(185,808	)
Cash flows from financing activities:
Sale of stock, net		1,693			1,756
Distribution to noncontrolling interest		–			(4,073	)
Increase in restricted deposits		(2,066	)		(2,432	)
Debt issuance and other financing costs		(1,252	)		(4,419	)
Proceeds from long-term borrowings and financings		17,703			168,300
Repayment of long-term borrowings and financings		(55,121	)		(75,992	)
Repayment of capital lease and financing obligations		(12,450	)		(10,456	)
Net cash provided by (used in) financing activities		(51,493	)		72,684
Net increase (decrease) in cash and cash equivalents		53,683			(49,371	)
Cash and cash equivalents at the beginning of the period		43,670			110,124
Cash and cash equivalents at the end of the period	$	97,353		$	60,753

See accompanying Notes to Condensed Consolidated Financial Statements

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EMERITUS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(In thousands)

	Nine Months Ended September 30,
	2012			2011
Supplemental disclosure of cash flow information:
Cash paid during the period for interest	$	112,635		$	107,861
Cash paid during the period for income taxes		1,087			1,144
Cash received during the period for income tax refunds		46			44
Non-cash financing and investing activities:
Capital contribution to Sunwest JV		(2,036	)		–
Distribution from Sunwest JV		2,036			–
Capital lease and financing obligations		–			391
Unrealized gain on investment in marketable equity securities		–			97
Debt refinanced		–			24,429
Receivable from exercise of stock options		78			37
Blackstone JV acquisition:
Fair value of assets acquired	$	–		$	317,323
Fair value of liabilities assumed		–			(173,193	)
Cash paid		–			(101,421	)
Carrying value of Emeritus investment		–			(599	)
Acquisition gain	$	–		$	42,110

See accompanying Notes to Condensed Consolidated Financial Statements

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EMERITUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Months Ended September 30, 2012 and 2011

Note 1.   Description of Business

Emeritus Corporation (“Emeritus,” the “Company,” “we,” “us,” or “our”) is an assisted living and Alzheimer’s and dementia care (“memory care”) service provider focused on operating residential style senior living communities with operations throughout the United States.  Each of these communities provides a residential housing alternative for senior citizens who need help with the activities of daily living, with an emphasis on assisted living and personal care services.  As of September 30, 2012, we owned 183 communities and leased 140 communities.  These 323 communities comprise the communities included in the condensed consolidated financial statements.

We also provide management services to independent and related-party owners of senior living communities.  As of September 30, 2012, we managed 154 communities, of which 142 are owned by joint ventures in which we have a financial interest.  The majority of our management agreements provide for fees of 5.0% of gross collected revenues.

We have one operating segment, which is assisted living and related services.  Each community provides similar services, namely assisted living and memory care.  The class of residents is relatively homogenous and the manner in which we operate each of our communities is basically the same.  Our chief operating decision maker, who is Granger Cobb, our president and chief executive officer, reviews the Company’s results of operations on a consolidated basis.

Note 2.   Summary of Significant Accounting Policies and Use of Estimates

To prepare financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”), management is required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, we evaluate our estimates, including those related to resident move-in fees, bad debts, investments, intangible assets, impairment of long-lived assets and goodwill, income taxes, contingencies, self-insured retention, insurance deductibles, health insurance, inputs to the Black-Scholes option pricing model, and litigation.  We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

We have adopted certain significant accounting policies that are critical to the judgments and estimates used in the preparation of our condensed consolidated financial statements.  We record revisions to such estimates in the period in which the facts that give rise to the revision become known.  A detailed discussion of our significant accounting policies and the use of estimates is contained in our Annual Report on Form 10-K for the year ended December 31, 2011 (“Form 10-K”), which we filed with the Securities and Exchange Commission (“SEC”).

Basis of Presentation

The unaudited condensed consolidated financial statements reflect all adjustments that are, in our opinion, necessary to fairly state our financial position, results of operations, and cash flows as of September 30, 2012 and for all periods presented.  Except as otherwise disclosed in these notes to the condensed consolidated financial statements, such adjustments are of a normal, recurring nature.  Our results of operations for the period ended September 30, 2012 are not necessarily indicative of the results of operations that we may achieve for the full year ending December 31, 2012.  We presume that readers of the interim financial information in this Quarterly Report on Form 10-Q have read or have access to our 2011 audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the year ended December 31, 2011.  Therefore, we have omitted certain footnotes and other disclosures that are disclosed in our Form 10-K.

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EMERITUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Months Ended September 30, 2012 and 2011

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Recent Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment.  The standard is intended to reduce the cost and complexity of testing indefinite-lived intangible assets other than goodwill for impairment. It allows companies to perform a "qualitative" assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary.  The standard allows an entity the option to first assess qualitatively whether it is more likely than not (that is, a likelihood of more than 50%) that an indefinite-lived intangible asset is impaired, thus necessitating that it perform the quantitative impairment test.  An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired.  We will be required to adopt ASU 2012-02 effective January 1, 2013 and do not expect that it will have a material impact on our financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income.  This standard eliminates the current option to report other comprehensive income and its components in the statement of shareholders’ equity.  We can elect to present items of net income and other comprehensive income in one continuous statement—referred to as the statement of comprehensive income—or in two separate, but consecutive, statements.  The statement(s) need to be presented with equal prominence as the other primary financial statements and prior period statement(s) are required to be recast to conform to the new presentation.  On December 23, 2011, the FASB decided to defer the new requirement to present reclassifications of other comprehensive income on the face of the income statement.  Companies are still required to adopt the other requirements contained in ASU 2011-05 for the presentation of comprehensive income.  We adopted ASU 2011-05 in the first quarter of 2012 and chose two separate, but consecutive statements.

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.  The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between generally accepted accounting principles in the United States (“GAAP”) and International Financial Reporting Standards.  We adopted ASU 2011-04 in the first quarter of 2012, and it did not have a material impact on our financial statements or related disclosures.

Revision of Prior Period Financial Statements

We manage certain communities under contracts that provide for payment to the Company of a monthly management fee plus reimbursement of certain operating expenses.  During the second quarter of 2012, we determined that the Company is the primary obligor for certain expenses incurred and those reimbursed operating expenses should be reported gross versus net as had been reported in prior periods.  Consequently, such expenses should be reported as costs incurred on behalf of managed communities and included in total operating expense in our condensed consolidated statements of operations with a corresponding amount of revenue recognized in the same period in which the expense is incurred and the Company is due reimbursement.

The prior-period financial statements included in this filing have been revised to reflect this correction, which increased our total operating expenses and total operating revenues by $51.0 million for the three months ended September 30, 2011 and $165.6 million for the nine months ended September 30, 2011.

These revisions were limited to total operating revenues and expenses and had no impact on our condensed consolidated balance sheets and statements of cash flows, operating income from continuing operations, or net loss.  We do not consider such revisions to be material to any previously issued financial statements.

Reimbursed Costs

Costs incurred on behalf of managed communities are comprised entirely of community operating expenses and include items such as employee compensation and benefits, insurance, and costs incurred under national vendor contracts. 

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EMERITUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Months Ended September 30, 2012 and 2011

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Note 3.   Stock-Based Compensation

We have three equity incentive plans: the Amended and Restated 2006 Equity Incentive Plan (the “2006 Plan”), the Amended and Restated Stock Option Plan for Non-employee Directors (the “Directors Plan”) and the 1995 Stock Incentive Plan (the “1995 Plan”).  Employees may also participate in our 2009 Employee Stock Purchase Plan (the “2009 ESP Plan”).  We record compensation expense based on the fair value for all stock-based awards, which amounted to $2.6 million and $2.2 million for the three months ended September 30, 2012 and 2011, respectively, and $8.3 million and $6.9 million for the nine months ended September 30, 2012 and 2011, respectively.

Stock Incentive Plans

The following table summarizes our stock option activity for the nine months ended September 30, 2012:

				Weighted		Aggregate
	Shares			Average		Intrinsic
	Underlying			Exercise		Value
	Options			Price		$(000)
Outstanding at beginning of period		4,470,939		$	18.52	$	6,825
Granted		60,000			16.01
Exercised		(105,208	)		9.47		1,102
Forfeited/expired		(137,825	)		17.52
Outstanding at end of period		4,287,906			18.74		15,480
Options exercisable		2,331,005			20.35		7,349
Weighted average grant date fair value					9.11
Options exercisable in the money		1,319,855					7,349
Options exercisable out of the money		1,011,150					–

We did not grant any restricted shares during the current period.

Note 4.   Acquisitions and Other Significant Transactions

From time to time, we make acquisitions and dispositions of certain businesses that we believe align with our strategic intent with respect to, among other factors, maximizing our revenues, operating income, and cash flows.

Community Sales

In September 2012, we sold an 80-unit community located in California.  Net proceeds from the sale of $4.5 million and cash on hand were used to pay off the related mortgage debt in the amount of $5.0 million.  We recorded a loss on the sale of approximately $3.9 million, which includes an impairment loss of $3.7 million recorded in the second quarter of 2012 and an allocation of goodwill (see Note 8).  We are managing this community on behalf of the purchaser on a short-term basis, pending completion of certain licensing requirements.

In August 2012, we sold a 38-unit community located in Iowa.  Net proceeds from the sale amounted to $4.0 million.  We recorded a loss on the sale of approximately $2.1 million, which includes an impairment loss of $1.9 million and an allocation of goodwill (see Note 8).

In July 2012, we sold a 52-unit community located in Georgia.  Net proceeds from the sale of $3.5 million were used to pay off the related mortgage debt in the amount of $3.4 million.  We recorded a loss on the sale of

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EMERITUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Months Ended September 30, 2012 and 2011

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approximately $257,000, resulting primarily from the write-off of goodwill and other intangible assets, in addition to a $597,000 impairment charge recorded in the second quarter of 2012 (see Note 8).

In April 2012, we sold a 66-unit assisted living and memory care community located in Indiana.  Net proceeds from the sale of approximately $3.7 million were used in part to pay off the related mortgage debt in the amount of $2.2 million.  We recorded a net gain on the sale of $215,000 and expense of $680,000 for a prepayment penalty and write-off of deferred loan fees.

2011 Blackstone JV Acquisition

On June 1, 2011, Emeritus and an affiliate of Blackstone Real Estate Advisors (“Blackstone”) completed the transactions whereby we acquired Blackstone’s equity interest in a joint venture (the “Blackstone JV”) that owned 24 assisted living communities (the “Blackstone JV Communities”) comprised of approximately 1,897 units.  Blackstone owned an 81.0% interest and we owned a 19.0% interest in such joint venture.  We previously accounted for our 19.0% interest in the Blackstone JV as an equity method investment.

The following table sets forth the effect on our results of operations had the acquisition of the Blackstone JV Communities occurred as of January 1, 2011, excluding a related $42.1 million gain on acquisition (in thousands, except per share):

	Pro Forma Combined
	(unaudited)
	Nine Months Ended
	September 30,
	2012			2011
Total operating revenues	$	1,130,513		$	1,129,572
Operating income from continuing operations		66,650			45,966
Loss from continuing operations		(49,845	)		(68,689	)
Net loss attributable to Emeritus Corporation common shareholders		(57,352	)		(86,029	)
Basic and diluted loss per common share attributable to Emeritus Corporation common shareholders:
Continuing operations	$	(1.12	)	$	(1.54	)
Discontinued operations		(0.17	)		(0.40	)
	$	(1.29	)	$	(1.94	)
Weighted average common shares outstanding		44,612			44,270

We previously operated the Blackstone JV Communities on behalf of the Blackstone JV under management agreements between us and each of the Blackstone JV Communities (the “Blackstone JV Management Agreements”).  As a result of the completion of the acquisition of the Blackstone JV Communities, each of the Blackstone JV Management Agreements was terminated.  The Blackstone JV Management Agreements provided for management fees equal to 5.0% of gross collected revenues.  We earned management fees of approximately $1.5 million in the nine months ended September 30, 2011.  The Blackstone JV Communities incurred no management fee expense from us subsequent to June 1, 2011, and our management fee revenue and the Blackstone JV management fee expense have been eliminated in the pro forma operating results above.

Other acquisitions in the year ended December 31, 2011, as discussed below, were not material to our condensed consolidated financial statements.  Therefore, we have not disclosed pro forma financial information related to these acquisitions.

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EMERITUS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Months Ended September 30, 2012 and 2011

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2011 Contract Buyout Agreement

In February 2011, we entered into an agreement with Mr. Daniel R. Baty, the chairman of our board of directors and one of the Company’s founders, to purchase his rights related to six of 18 communities included in the cash flow sharing agreement (“CFSA”) between Emeritus and Mr. Baty (the “Buyout”).  Mr. Baty was originally granted these rights in exchange for guaranteeing our obligations under a lease agreement.  Three of the six communities in the Buyout were owned by our 50/50 consolidated joint venture with Mr. Baty (the “Batus JV”), and the Buyout also included our purchase of Mr. Baty’s equity interest in these three communities.  We paid to Mr. Baty a total of $10.3 million in cash under the terms of the Buyout, which was based on predetermined formulas in the joint venture agreement and the CFSA.  Of the $10.3 million payment, we recorded $6.2 million to transaction costs and decreased total shareholders’ equity by $4.1 million; this allocation approximated the relative fair value of the two elements in the transaction, which were the CFSA and the equity interest in the 50/50 joint venture, respectively.

In November 2011, we exercised our option to buy three additional communities included in the CFSA.  Two of the three communities were owned by the Batus JV, and we purchased Mr. Baty’s equity interest in these communities.  We paid to Mr. Baty a total of $4.2 million in cash, of which we recorded $1.6 million to transaction costs and decreased total shareholders’ equity by $2.6 million.

Other 2011 Acquisitions and Dispositions

During 2011, we purchased six assisted living communities with a total of 536 units.  The aggregate purchase price was $83.0 million and we financed these purchases with mortgage debt totaling $62.4 million and cash on hand.  We accounted for these acquisitions as business combinations.

During 2011, we sold eight communities with a total of 825 units and used the net proceeds to retire the related mortgage debt.

Note 5.   Long-Term Debt

Debt refinancing

In July 2012, we entered into a mortgage loan agreement in the amount of $6.8 million.  The loan requires monthly payments of $50,000 with an adjustable interest rate equal to LIBOR plus 5.85%.   The loan matures in July 2015 with a one-year extension option.  Proceeds from the loan, together with available cash, were used to repay an existing mortgage loan with KeyBank with an outstanding principal balance of $6.9 million.  In accordance with the terms of the loan agreement with KeyBank, which originally covered 16 communities, we are required to reduce the overall principal balance to specified levels during the term of the agreement.

In June 2012, we refinanced $11.1 million of mortgage debt, which was due to mature in November 2012, with Fannie Mae financing in the amount of $10.6 million.  Monthly payments of principal and interest are based on a 25-year amortization with a fixed interest rate of 4.58%, with principal due at maturity in July 2022.

Debt Covenants

Our lease and loan agreements generally include customary provisions related to: (i) restrictions on cash dividends, investments, and borrowings; (ii) cash held in escrow for real estate taxes, insurance, and building maintenance; (iii) financial reporting requirements; and (iv) events of default.  Certain loan agreements require the maintenance of debt service coverage or other financial ratios and specify minimum required annual capital expenditures at the corresponding communities.  Many of the lease and debt instruments contain cross-default provisions whereby a default under one obligation can cause a default under one or more other obligations.  Accordingly, an event of default could have a material adverse effect on our financial condition if a lender or landlord exercised its rights under an event of default.  Such cross-default provisions affect the majority of our properties.  Accordingly, an event of default could cause a material adverse effect on our financial condition if such debts/leases are cross-defaulted.  As of September 30, 2012, we were in violation of financial covenants in a debt agreement covering two communities with an aggregate outstanding principal balance of $14.1 million. This loan matures in November 2012

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Nine Months Ended September 30, 2012 and 2011

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and we are in negotiations to refinance it.  In addition, we were in violation of financial covenants in a lease agreement covering one community.  We obtained waivers from the lender and lessor through September 30, 2012 and, as such, are in compliance as of that date.  As required, we will test for compliance again on the next measurement date of December 31, 2012.  

Note 6.   Derivative Financial Instruments

In connection with the acquisition of the Blackstone JV Communities described in Note 4, 2011 Blackstone JV Acquisition, we refinanced the debt that was assumed in the transaction to a total of $220.0 million pursuant to a credit agreement (“Credit Agreement”) with General Electric Capital Corporation (“GECC”).  A portion of the assumed debt retained an interest rate swap that expired in January 2012.  Under the terms of the Credit Agreement, the loan bears interest at a floating rate equal to 4.05%, plus the greater of:  (i) the 90-day London Interbank Offered Rate (“LIBOR”) or (ii) 1.0% per annum, or a minimum floor of 5.05%, reset each month.  Pursuant to the terms of the Credit Agreement, in October 2011 we purchased an interest rate cap for a cash payment of $1.6 million.  This contract effectively caps the LIBOR on a notional amount of $132.0 million at 2.50% over the term of the loan.  As of September 30, 2012, the fair value of the interest rate cap was $194,000, which is included in other assets, net, in the condensed consolidated balance sheet (see Note 10).

Note 7.   Income (Loss) Per Share

Potential dilutive shares consist of the incremental common shares issuable upon the exercise of outstanding stock options (both vested and non-vested), using the treasury stock method. Potential dilutive shares are excluded from the computation of earnings per share if their effect is antidilutive.  For the three and nine months ended September 30, 2012, we had outstanding stock options totaling 4.3 million that were excluded from the computation of net loss per share because they were antidilutive.  For the three and nine months ended September 30, 2011, we excluded 4.1 million stock options, respectively, from net income (loss) per share because they were antidilutive.

Performance-based restricted shares, totaling 435,000 shares as of September 30, 2012, are included in total outstanding shares but are excluded from the loss per share calculation until the related performance criteria have been met.

Note 8.   Discontinued Operations

Loss from discontinued operations for the three and nine months ended September 30, 2012 represents impairment charges and net losses on the sale of three communities in the third quarter of 2012 and one community in April 2012 (see Note 10).  Loss from discontinued operations for the three and nine months ended September 30, 2011 represents impairment charges of $17.5 million related to five communities held for sale as of September 30, 2011 and net gains/losses on the sale of one community in August 2011 and two communities in May 2011.

Note 9.   Liquidity

As of September 30, 2012, we had a working capital deficit of $72.1 million compared to a working capital deficit of $100.1 million at December 31, 2011.  We are able to operate in the position of a working capital deficit because we often convert our revenues to cash more quickly than we are required to pay the corresponding obligations incurred to generate those revenues, and we have historically refinanced or extended maturities of debt obligations as they become current liabilities.  Our operations result in a low level of current assets to the extent we have used cash for business development expenses or to pay down long-term liabilities.  Additionally, the working capital deficit as of September 30, 2012 included the following non-cash items: a $20.7 million deferred tax asset and, as part of current liabilities, $34.0 million of deferred revenue and unearned rental income.  A $20.7 million deferred tax liability was included in other long-term liabilities.  We do not expect the level of current liabilities to change from period to period in such a way as to require the use of significant cash in excess of normal requirements, except for $29.1 million in final (“balloon”) payments of principal on long-term debt maturing in the next 12 months, which is included in current portion of long-term debt as of September 30, 2012.

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Three and Nine Months Ended September 30, 2012 and 2011

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Since 2008, we have refinanced and extended the terms of a substantial amount of our existing debt obligations, extending the maturities of such financings to dates in 2012 through 2047.  Balloon payments of principal on long-term debt maturing in the next 12 months amount to $29.1 million, which are expected to be repaid, refinanced, or extended.  Many of our debt instruments and leases contain “cross-default” provisions pursuant to which a default under one obligation can cause a default under one or more other obligations to the same lender or lessor.  Such cross-default provisions affect the majority of our properties.  Accordingly, any event of default could cause a material adverse effect on our financial condition if such debt or leases are cross-defaulted.

In the nine months ended September 30, 2012 and 2011, we reported net cash provided by operating activities of $110.6 million and $63.8 million, respectively, in our condensed consolidated statements of cash flows.  Net cash provided by operating activities in the first nine months of 2011 is net of $6.2 million in contract buyout costs treated as transaction expenses (see Note 4).  In addition, our net trade accounts receivable increased by $6.1 million from December 31, 2010 to September 30, 2011, due primarily to delays in Medicare reimbursement for certain communities that we began operating under lease agreements in the fourth quarter of 2010, which include skilled nursing beds.  Delays are customary when there is a change in providers, and payments were received prior to the end of 2011.  Net cash provided by operating activities has not always been sufficient to pay all of our long-term obligations and we have been dependent upon third-party financing or disposition of assets to fund operations.  We cannot guarantee that, if necessary in the future, such transactions will be available on a timely basis or at all, or on terms attractive to us.

As discussed above, we expect to refinance or extend our balloon payments due in 2012; however, if we are unable to do so, we believe the Company would be able to generate sufficient cash flows to support its operating and investing activities and financing obligations for at least the next 12 months by conserving its capital expenditures and operating expenses or selling communities or a combination thereof.  In connection with Emeritus’ guarantees of certain debt and lease agreements, we are required at all times to maintain a minimum $20.0 million balance of unencumbered liquid assets, defined as cash, cash equivalents and/or publicly traded/quoted marketable securities.  As a result, $20.0 million of our cash on hand is not available to fund operations and we take this into account in our cash management activities.

Note 10.     Fair Value Disclosures

The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011 and indicates the fair value hierarchy of the valuation techniques we have utilized to determine such fair value (in thousands):

	Quoted Prices in		Significant
	Active Markets		Other		Significant		Balance as of
	for Identical		Observable		Unobservable		September 30,
	Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)		2012
Assets
Investment securities - trading	$	4,668	$	–	$	–	$	4,668
Interest rate cap agreement		–		194		–		194
	Quoted Prices in		Significant
	Active Markets		Other		Significant		Balance as of
	for Identical		Observable		Unobservable		December 31,
	Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)			2011
Assets
Investment securities - trading	$	3,585	$	–	$	–	$	3,585
Interest rate cap agreement		–		1,146		–		1,146
Liabilities
Interest rate swap agreement		–		33		–		33

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Three and Nine Months Ended September 30, 2012 and 2011

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In general, fair values determined by Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Fair values determined by Level 2 inputs utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly.  Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability.

Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.  Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and we consider many factors specific to the asset or liability.

We have financial instruments other than investment securities consisting of cash equivalents, other receivables, tax and maintenance escrows, workers’ compensation collateral accounts, and long-term debt.  As of September 30, 2012 and December 31, 2011, the fair values of other receivables, tax and maintenance escrows, and workers’ compensation collateral accounts approximate their carrying values based on their short-term nature as well as current market indicators, such as prevailing interest rates (Level 2 inputs).  The fair value of our long-term debt is as follows as of the periods indicated (in thousands):

	September 30, 2012				December 31, 2011
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Long-term debt	$	1,567,349	$	1,618,389	$	1,602,885	$	1,660,451

We estimated the fair value of debt obligations using discounted cash flows based on our assumed incremental borrowing rate of 8.5% for unsecured borrowings and 5.4% for secured borrowings (Level 2 inputs).

Impairments of Long-Lived Assets

We designate communities as held for sale when it is probable that the properties will be sold.  As a result, we may record impairment losses in order to carry these assets on our balance sheet at fair value less estimated selling costs.  These losses are included in discontinued operations in the condensed consolidated statements of operations.  We determine the fair value of the properties based primarily on purchase and sale agreements from prospective purchases (Level 2 input).  In periods prior to designating the properties as held for sale, when a triggering event occurs, we test these properties for recoverability by applying probability weighting to the estimated undiscounted future cash flows of the communities based on the probability of selling the properties versus continuing to operate them.

In the third quarter of 2012, we designated one community as held for sale and sold it in September 2012.  As a result, we recorded an impairment loss of $1.9 million.

In the second quarter of 2012, we recorded impairment charges of $4.3 million related to two communities that we classified as held for sale and subsequently sold in the third quarter of 2012.  We determined the fair values based on pending purchase offers, less estimated selling costs (Level 2 input).  The impairment charges are included in loss on discontinued operations in the condensed consolidated statement of operations.

In the first quarter of 2012, we recorded impairment charges of $2.1 million related to two parcels of undeveloped land.  We determined the fair values of the properties based on comparable land sales in the respective local markets (Level 2 input).  The impairment charges are reflected in the condensed consolidated statement of operations as impairments of long-lived assets.

In the third quarter of 2011, we designated five communities as held for sale and, as a result, recorded impairment losses of $17.5 million.  We sold these communities in December 2011.  In the second quarter of 2011, we recorded an impairment charge of $397,000, which was based on the actual selling prices of two communities, net of selling costs (see Note 8).

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Three and Nine Months Ended September 30, 2012 and 2011

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Note 11.     Income Taxes

Our income tax accruals include liabilities for unrecognized tax benefits, including penalties and interest, which we recorded in connection with our acquisition of Summerville Senior Living in 2007.  These liabilities, which totaled $422,000 as of September 30, 2012, are included in other long-term liabilities and are the result of uncertainty surrounding the deductibility of certain items included in the Summerville tax returns for periods prior to the merger.

We record deferred income taxes based on the estimated future tax effects of loss carryforwards and temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases.  We record a valuation allowance to reduce the Company’s deferred tax assets to the amount that is more likely than not to be realized, which as of September 30, 2012 and December 31, 2011, reflected a net asset value of zero.  Deferred tax assets are recorded as current assets in the condensed consolidated balance sheets and amounted to $20.7 million and $19.9 million as of September 30, 2012 and December 31, 2011, respectively.  Deferred tax liabilities amounted to $20.7 million and $19.9 million as of September 30, 2012 and December 31, 2011, respectively, which are included in other long-term liabilities in the condensed consolidated balance sheets.

Because the Company fully reserves its deferred tax assets, no net tax effects were allocated to the components of other comprehensive loss.

Note 12.     Litigation

The Company has been and is currently involved in litigation and claims incidental to the conduct of its business that are comparable to other companies in the senior living industry, including professional and general liability claims.  Certain claims and lawsuits allege large damage amounts and may require significant costs to defend and resolve.  As a result, we maintain a combination of self-insurance reserves and commercial insurance policies in amounts and with coverage and deductibles that we believe are adequate, based on the nature and risks of our business, historical experience, and industry standards.  

As of September 30, 2012, we have recorded a liability related to self-insured professional and general claims, including known claims and incurred but not yet reported claims, of $23.6 million.  We believe that the range of reasonably possible losses as of September 30, 2012, based on sensitivity testing of the various underlying actuarial assumptions, is approximately $22.4 million to $31.7 million.  The high end of the range reflects the potential for high-severity losses.

Note 13.     Subsequent Events

Sunwest JV

On October 16, 2012, we announced that the Company had entered into definitive agreements with HCP, Inc. (“HCP”) and affiliates of Blackstone under which HCP and Emeritus will acquire a total of 142 senior housing communities (the “Communities”), representing approximately 11,350 units, owned by a joint venture comprised of Emeritus, Blackstone, certain former tenants-in-common, and an investment fund affiliated with Mr. Baty (the “Sunwest JV”).  Emeritus owns a minority interest of approximately 6% in the Sunwest JV and has been operating the Communities since 2010 under management agreements for a fee equal to 5.0% of collected revenues.

Upon consummation of the transaction, HCP will acquire 133 of the Communities for an aggregate purchase price of $1.7 billion, consisting of cash and the assumption of existing debt.  Emeritus will receive cash of approximately $140 million, comprised of approximately $40 million for the Company’s interest in the Sunwest JV and an incentive payment of approximately $100 million based on the final rate of return to the Sunwest JV’s investors.  On October 31, 2012, HCP closed on the acquisition of 127 of the 133 Communities and, as part of the transaction, Emeritus also acquired nine Communities for $62.0 million, of which $10.0 million was paid in cash and $52.0 million was financed with a four-year loan from HCP with an initial interest rate of 6.1%.

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Three and Nine Months Ended September 30, 2012 and 2011

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After completing the transaction, we will continue to operate the 133 Communities purchased by HCP under long-term triple-net master leases (collectively, the “HCP Lease”).  Rent in the first year of the HCP Lease will amount to $105.5 million and will increase each year in the manner specified in the lease.  The HCP Lease is grouped into three comparable pools of properties with initial terms of between 14 and 16 years.  The Company is provided with two options to extend the HCP Lease, which, if exercised, would extend the lease to terms of between 29 and 35 years.  Emeritus has committed to make $30.0 million in capital improvements with respect to these Communities, and such expenditures are expected to be made within the first two years of closing the transaction.

The closing of the remaining six Communities is expected to be completed in the fourth quarter of 2012.

Nurse on Call

On November 1, 2012, we announced that the Company has entered into an agreement to purchase Nurse on Call, Inc. (“NOC”), the largest Medicare-licensed home health care provider in Florida and one of the largest such providers in the United States.  Emeritus will pay $102 million in cash for 91% of the equity of NOC’s parent company, and the remaining equity will be owned by certain members of NOC’s management team.  The Company will fund the purchase primarily from net proceeds realized from the sale of the Sunwest JV Communities.

Final closing of this transaction is subject to customary closing conditions for an acquisition of this nature and is expected to be completed in the fourth quarter of 2012.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

The disclosure and analysis in this Quarterly Report on Form 10-Q contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended.  You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts.  They often include words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “predict,” “seek,” “should,” “will,” or the negative of those terms, or comparable terminology.  These forward-looking statements are all based on currently available operating, financial and competitive information and are subject to various risks and uncertainties.  Our actual future results and trends may differ materially depending on a variety of factors, including, but not limited to, the risks and uncertainties discussed under Risk Factors and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

Any or all of our forward-looking statements in this report may turn out to be inaccurate.  Incorrect assumptions we might make and known or unknown risks and uncertainties may affect the accuracy of our forward-looking statements.  Forward-looking statements reflect our current expectations or forecasts of future events or results and are inherently uncertain.  Accordingly, you should not place undue reliance on our forward-looking statements.

Although we believe that the expectations and forecasts reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance, or achievements.  Consequently, no forward-looking statement can be guaranteed, and future events and actual or suggested results may differ materially.  We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements.  We expressly disclaim any obligation to publicly update any forward-looking statements, whether as a result of new information, future events, or otherwise.  You are advised, however, to consult any further disclosures we make in our quarterly reports on Form 10-Q and current reports on Form 8-K.

Recent Developments

On October 16, 2012, we announced that the Company had entered into definitive agreements with HCP and affiliates of Blackstone under which HCP and Emeritus will acquire a total of 142 Communities representing approximately 11,350 units, owned by the Sunwest JV.  Emeritus owns a minority interest of approximately 6% in the Sunwest JV and has been operating the Communities since 2010 under management agreements for a fee equal to 5.0% of collected revenues.

Upon consummation of the transaction, HCP will acquire 133 of the Communities for an aggregate purchase price of $1.7 billion, consisting of cash and the assumption of existing debt.  Emeritus will receive cash of approximately $140 million, comprised of approximately $40 million for the Company’s interest in the Sunwest JV and an incentive payment of approximately $100 million based on the final rate of return to the Sunwest JV’s investors.  On October 31, 2012, HCP closed on the acquisition of 127 of the 133 Communities and, as part of the transaction, Emeritus also acquired nine Communities for $62.0 million, of which $10.0 million was paid in cash and $52.0 million was financed with a four-year loan from HCP with an initial interest rate of 6.1%.

After completing the transaction, we will continue to operate the 133 Communities purchased by HCP, under long-term triple-net master leases.  For further details see Note 13, Subsequent Events—Sunwest JV.

On November 1, 2012, we announced that the Company has entered into an agreement to purchase Nurse on Call, Inc. (“NOC”), the largest Medicare-licensed home health care provider in Florida and one of the largest such providers in the United States.  Emeritus will pay $102 million in cash for 91% of the equity of NOC’s parent company, and the remaining equity will be owned by certain members of NOC’s management team.  The Company will fund the purchase primarily from net proceeds realized from the sale of the Sunwest JV Communities.

Through 28 offices serving 47 counties in Florida, NOC’s caregivers provide skilled nursing, rehabilitation therapy, medical social services, and other home health assistance to individuals in their homes who may be recovering from surgery, have an acute exacerbation of a chronic illness, or need assistance with the activities of daily living.  NOC and its affiliates currently generate annualized revenues of approximately $140 million and earnings before interest, income taxes, depreciation and amortization of approximately $17 million.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - CONTINUED

Three and Nine Months Ended September 30, 2012 and 2011

Overview

A summary of activity for the first nine months of 2012, compared to the same period for 2011, is as follows:

·   Total operating revenues increased $34.3 million, or 3.1%, to $1.13 billion from $1.1 billion for the prior-year period.

·   Operating income from continuing operations increased $22.9 million to $66.7 million from $43.8 million for the prior-year period.  Our net loss attributable to Emeritus Corporation common shareholders was $57.4 million compared to $44.0 million for the prior-year period.  Our prior-period results included a $42.1 million gain on the acquisition of the Blackstone JV Communities offset by transaction costs of $9.1 million during the period, which transaction costs included $6.2 million resulting from our buyout of certain communities subject to a cash flow sharing arrangement.

·   Average occupancy of our portfolio of owned and leased communities (the “Consolidated Portfolio”) increased to 86.7% from 86.2% for the prior-year period.

·   Average rate per occupied unit increased 2.4% to $4,157 from $4,060 for the prior-year period.

·   Net cash provided by operating activities was $110.6 million compared to $63.8 million for the prior-year period.

Our Portfolios

As of September 30, 2012, our Consolidated Portfolio had a capacity of 35,027 beds in 37 states, and our Operated Portfolio had a capacity of 49,828 beds in 44 states.  The following table sets forth a comparison of our Consolidated and Operated Portfolios:

	September 30, 2012		December 31, 2011		September 30, 2011
	Community Count	Unit Count (b)	Community Count	Unit Count (b)	Community Count	Unit Count (b)
Owned	183	15,073	187	15,309	192	15,798
Leased(a)	140	14,499	141	14,596	141	14,594
Consolidated Portfolio	323	29,572	328	29,905	333	30,392
Managed	12	1,264	9	933	11	1,121
Managed - Joint Ventures	142	11,845	141	11,809	141	11,809
Operated Portfolio	477	42,681	478	42,647	485	43,322
(a)  We account for 79 of the 140 leased communities as operating leases, 58 as capital leases, and three as financing leases.  We do not include the assets and
liabilities of the 79 operating lease communities on our condensed consolidated balance sheets.
(b)  Total units reflect skilled nursing units in terms of beds.

Our Total Operated Portfolio as of September 30, 2012 consisted of the following unit types:

	Units by Type of Service
	AL (a)		MC (b)		IL (c)		SN (d)		Other (e)		Total
Owned		11,159		2,893		698		148		175		15,073
Leased		10,694		2,259		674		826		46		14,499
Consolidated Portfolio		21,853		5,152		1,372		974		221		29,572
Managed		778		216		265		–		5		1,264
Managed - Joint Ventures		6,926		1,372		3,004		195		348		11,845
Operated Portfolio		29,557		6,740		4,641		1,169		574		42,681
(a) Assisted living
(b) Memory care
(c) Independent living
(d) Skilled nursing beds
(e) Units taken out of service

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS - CONTINUED

Three and Nine Months Ended September 30, 2012 and 2011

The units taken out of service represent rooms that we have converted to alternative uses, such as additional office space, and are not available for immediate occupancy.  We exclude the units taken out of service from the calculation of the average occupancy rate.  We place these units back into service as demand dictates.

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RESULTS OF OPERATIONS - CONTINUED

Three and Nine Months Ended September 30, 2012 and 2011

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Significant Transactions

In recent periods, we entered into a number of transactions that affected the number of communities we operate, our financing arrangements, and our capital structure.  These transactions are summarized below.

		Transaction Period	Unit Count	Transaction Type	D in Owned Count	Purchase Price (000) (a)(b)	Amount Financed (000) (b)	D in Leased Count	D in Managed Count
Count as of December 31, 2010					165			141	173
2011 Activity
Plaza on the River		Jan 2011	64	Joint venture (c)	–	N/A	N/A	–	–
Emeritus at Baywood		Jan 2011	126	Acquisition	1	12,855	10,000	–	–
Emeritus at Steel Lake		Mar 2011	87	Managed	–	N/A	N/A		1
Emeritus at Mandeville		Mar 2011	84	Acquisition	1	10,400	7,800	–	–
Palmer Ranch Healthcare		Apr 2011	160	Joint venture (c)	–	N/A	N/A	–	1
Emeritus at Spruce Wood		May 2011	90	Acquisition	1	19,065	14,115	–	–
Emeritus at New Port Richey		May 2011	70	Disposition	(1)	N/A	N/A	–	–
Emeritus at Venice		May 2011	78	Disposition	(1)	N/A	N/A	–	–
Blackstone JV		Jun 2011	1,897	Acquisition (d)	24	144,130	58,608	–	(24)
Emeritus at Fillmore Pond		Jul 2011	101	Acquisition	1	20,935	15,825	–	–
Emeritus at Vista Oaks and
Emeritus at Summer Ridge		Jul 2011	135	Acquisition	2	19,700	14,700	–	–
Emeritus at Lakeland Hills		Aug 2011	170	Disposition	(1)	N/A	N/A	–	–
Emeritus at Long Cove Pointe		Sep 2011	81	Joint venture	–	N/A	N/A	–	1
Emeritus at Bayside Terrace		Oct 2011	154	Disposition					(1)
Colonial Gardens		Oct 2011	47	Disposition					(1)
Emeritus at Pavillion		Dec 2011	174	Disposition	(1)	N/A	N/A	–	–
Emeritus at Cambria		Dec 2011	79	Disposition	(1)	N/A	N/A		–
Emeritus at Palisades		Dec 2011	158	Disposition	(1)	N/A	N/A		–
Emeritus at Cielo Vista		Dec 2011	66	Disposition	(1)	N/A	N/A		–
Emeritus at Desert Springs		Dec 2011	30	Disposition	(1)	N/A	N/A		–
Count as of December 31, 2011					187			141	150
2012 Activity
Emeritus at Greenwood		Apr 2012	66	Disposition	(1)	N/A	N/A	–	–
Eastwood and Tanglewood Trace		Jul 2012	250	Managed		N/A	N/A		2
Emeritus at Vinings Place		Jul 2012	52	Disposition	(1)	N/A	N/A
Emeritus at Landmark Villa		Aug 2012	97	Disposition		N/A	N/A	(1)
Emeritus at Urbandale		Aug 2012	38	Disposition	(1)	N/A	N/A	–	–
Emeritus at Fulton Villa		Sep 2012	80	Managed	(1)	N/A	N/A		1
Emeritus at Woodland Place		Sep 2012	36	Joint Venture		N/A	N/A	–	1
Count as of September 30, 2012					183			140	154
(a)	Purchase price exclusive of closing costs.
(b)	Purchase price and amount financed are not applicable for new lease and management agreements or expansions and dispositions.
(c)	Management of units previously operated by an unrelated third party.
(d)	Represents the purchase of Blackstone's 81% ownership interest in the joint venture.  See Note 4, Acquisitions and Other Significant Transactions-Blackstone JV Acquisition.

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Results of Operations

Sources of Revenues

We generate revenues by providing senior housing and related healthcare services to the senior population.  We are the largest provider of assisted living and memory care services in the United States, with a capacity for approximately 50,000 residents.  Assisted living and memory care units comprise approximately 85% of our total Operated Portfolio.

The two basic drivers of our community revenues are the rates we charge our residents and the occupancy levels we achieve in our communities.  In evaluating the rate component, we utilize the average monthly revenue per occupied unit, computed by dividing the total operating revenue for a particular period by the average number of occupied units for the same period.  In evaluating the occupancy component, we track the average occupancy rate, computed by dividing the average units occupied during a particular period by the average number of units available during the period.

We rely primarily on our residents’ ability to pay our charges from their own or family resources and expect that we will do so for the foreseeable future.  Private pay revenues represent 87.5% of our payor mix in the first nine months of 2012.  We believe that only residents with income or assets meeting or exceeding the regional median can afford to reside in our communities, and that the rates we charge and our occupancy levels are interrelated.  Therefore, we continuously evaluate rate and occupancy in each community to find the optimal balance so that we can benefit from our increasing capacity and anticipated future occupancy increases.  Although our business is primarily needs-driven, we believe that our occupancy growth has been slowed due to the ongoing economic downturn, as some seniors and their families have postponed moves for financial reasons, and we believe that high unemployment has enabled family members and others to provide home care for seniors.

Revenues from government reimbursement programs, which are the federal Medicare and state Medicaid programs, represented 12.5% of our community revenues in the first nine months of 2012 compared to 12.9% in the comparable 2011 period.  Future changes in revenues from Medicare and Medicaid programs in our existing communities will depend upon factors that include resident mix, levels of acuity among our residents, overall occupancy and government reimbursement rates.  There continue to be various federal and state legislative and regulatory proposals to implement cost containment measures that would limit payments to healthcare providers in the future.

We also earn management fee revenues by managing certain communities for third parties, including communities owned by related parties and by joint ventures in which we have an ownership interest.  The majority of our management agreements provide for fees equal to 5.0% of gross collected revenues.

In addition to our monthly management fee, we receive reimbursement for operating expenses of managed communities.  During the second quarter of 2012, we determined that the Company is the primary obligor for certain expenses incurred and those reimbursed operating expenses should be reported gross versus net as had been reported in prior periods.  Consequently, such expenses should be reported as costs incurred on behalf of managed communities and included in total operating expense in our condensed consolidated statements of operations with a corresponding amount of revenue recognized in the same period in which the expense is incurred and the Company is due reimbursement.

The prior-period financial statements included in this filing have been revised to reflect this correction, which increased our total operating expenses and total operating revenues by $51.0 million for the three months ended September 30, 2011 and $165.6 million for the nine months ended September 30, 2011.

These revisions were limited to total operating revenues and expenses and had no impact on the Company’s condensed consolidated balance sheets and statements of cash flows, operating income from continuing operations, or net loss.  We do not consider such revisions to be material to any previously issued financial statements.

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Same Community Portfolio Analysis

Of the 323 communities included in our Consolidated Portfolio as of September 30, 2012, we include 293 communities in our Same Community Portfolio.  For purposes of comparing the three months ended September 30, 2012 and 2011, we define same communities as those communities that we have continuously operated since January 1, 2011, and did not include properties where we opened new expansion projects during the comparable periods, communities in which we substantially changed the service category we offered, or communities we accounted for as discontinued operations.

Selected data from our Same Community Portfolio is as follows:

	Three Months Ended September 30,
	2012			2011			$D			% D		(a) (b)
	(in thousands, except percentages)
Community revenue	$	294,766		$	287,997		$	6,769			2.4	%
Community operations expense		(196,432	)		(191,582	)		(4,850	)		(2.5	)%
Community operating income	$	98,334		$	96,415		$	1,919			2.0	%
Average monthly revenue per occupied unit	$	4,179		$	4,100		$	79			1.9	%
Average occupancy rate		87.4	%		87.1	%				0.3 ppt

(a) "N/M" indicates percentages that are not meaningful in this analysis.  Applies to all subsequent tables in this section.

(b) "ppt" refers to percentage points.  Applies to all subsequent tables in this section.

Revenues from our Same Community Portfolio represented 91.0% of our total community revenue for the third quarter of 2012, compared to 90.5% for the third quarter of 2011.  Of the $6.8 million increase in same community revenues, $1.2 million was due to improved occupancy and $5.6 million was due to an increase in average revenue per occupied unit.

The $4.9 million increase in operating expense from the Same Community Portfolio was primarily due to increases in employee recruiting and training, contracted services, professional liability insurance, bad debt expense, and a variety of other expenses.

Comparison of the Three Months Ended September 30, 2012 and 2011

Net Loss Attributable to Emeritus Corporation Common Shareholders

We reported a net loss attributable to Emeritus common shareholders of $16.3 million for the three months ended September 30, 2012, compared to a net loss of $43.6 million in the prior-year period.  As further described in the section Liquidity and Capital Resources below, the Company has incurred significant losses since its inception, but has generated annual positive cash flow from operating activities since 2001.

The details of each of the components of net loss are set forth below.

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Total Operating Revenues:

	Three Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Same Community Portfolio	$	294,766		$	287,997		$	6,769			2.4	%
Acquisitions, dispositions, development and expansion		28,803			31,385			(2,582	)		(8.2	%)
Unallocated community revenue (a)		305			(1,145	)		1,450			126.6	%
Community revenue		323,874			318,237			5,637			1.8	%
Management fees		5,293			5,000			293			5.9	%
Reimbursed costs incurred on behalf of managed communities		51,953			51,020			933			1.8	%
Total operating revenues	$	381,120		$	374,257		$	6,863			1.8	%
Average monthly revenue per occupied unit	$	4,198		$	4,065		$	133			3.3	%
Average occupancy rate		87.1	%		86.5	%				0.6 ppt

  (a) Comprised primarily of deferred move-in fees.

Revenues from communities not in our Same Community Portfolio decreased by $2.6 million due to three dispositions completed during the third quarter of 2012.  The change in unallocated community revenue of $1.5 million resulted primarily from an overall decrease in the recognition of revenue for resident move-in fees, which we recognize over the average resident stay.

As of September 30, 2012, we managed 139 communities for the Sunwest JV, a joint venture with an affiliate of Blackstone and an entity controlled by Mr. Baty, three communities in joint ventures with an affiliate of The Wegman Companies, Inc. (“Wegman”), and 12 other communities for third parties.  The Sunwest JV contributed $4.8 million and $4.6 million to management fee revenues in the three-month periods ended September 30, 2012 and 2011, respectively.

Community Operating Expense:

	Three Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Same Community Portfolio	$	196,432		$	191,582		$	4,850			2.5	%
Acquisitions, dispositions, development, and expansion		20,473			22,790			(2,317	)		(10.2	%)
Unallocated community expenses		38			9,051			(9,013	)		N/M
Community operations	$	216,943		$	223,423		$	(6,480	)		(2.9	%)
As a percentage of total operating revenues		56.9	%		59.7	%				(2.8) ppt

Community operating expense represents direct costs incurred to operate the communities and includes costs such as payroll and benefits, resident activities, marketing, housekeeping, food service, facility maintenance, utilities, taxes, insurance, and licenses.

Community operating expense in our Same Community Portfolio increased, as described above under Same Community Portfolio.  We focus on providing the appropriate level of care at our communities, while also pursuing overall expense efficiencies.  For example, in the first half of 2011, we implemented an improved labor hours tracking system.

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Unallocated community expenses primarily represent reserve adjustments for workers’ compensation insurance and professional and general liability insurance.  We periodically adjust our estimated self-insurance liabilities based on actuarial projected losses, representing our revised estimates of the ultimate exposure under the Company’s self-insurance programs.  On a consolidated basis, in the third quarter of 2011, we recorded an $8.5 million expense to increase the accrual for professional and general self-insurance for prior-years’ claims exposure, which was based on the progression of open claims during the quarter, including an unfavorable jury verdict, as well as recent settlement activity.

General and Administrative Expense:

	Three Months Ended September 30,
	2012			2011			$D		% D
	(in thousands, except percentages)
General and administrative	$	23,082		$	21,671		$	1,411		6.5	%
As a percentage of total operating revenues		6.1	%		5.8	%			0.3 ppt

The increase in general and administrative expenses reflects increases in employee compensation, including noncash stock compensation expense, and professional and consulting fees.

General and administrative expense as a percentage of community operating revenues for all managed and consolidated communities increased to 5.3% for the three months ended September 30, 2012 from 5.2% for the same quarter for 2011.

We computed these percentages as follows:

	Three Months Ended September 30,
	2012					2011
	(in thousands, except percentages)
General and administrative expenses			$	23,082				$	21,671
Sources of revenue:
Owned and leased	$	323,874				$	318,237
Managed		108,431					101,878
Total revenue for all communities in our Operated Portfolio			$	432,305				$	420,115
General and administrative expenses as a percent of
all sources of community revenue				5.3	%				5.2	%
General and administrative expenses less stock-based
compensation as a percent of all sources of community revenue				4.7	%				4.6	%

We focus on overhead expense efficiencies, while ensuring adequate infrastructure to support our operational needs.  For example, in the first half of 2011 we eliminated certain processes and related positions that were deemed to duplicate or be less efficient than similar processes performed elsewhere within the organization.

Transaction Costs:

	Three Months Ended September 30,
	2012			2011			$D		% D
	(in thousands, except percentages)
Transaction costs	$	1,292		$	492		$	800		162.6	%
As a percentage of total operating revenues		0.3	%		0.1	%			0.2 ppt

Transaction costs represent professional and consulting fees incurred related to community purchases and other acquisition activity.

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Depreciation and Amortization Expense:

	Three Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Depreciation and amortization	$	32,461		$	32,540		$	(79	)		(0.2	%)
As a percentage of total operating revenues		8.5	%		8.7	%				(0.2) ppt

The net decrease in depreciation and amortization expense represents an increase in depreciation expense of $139,000 and a decrease in amortization expense of $218,000.  The increased depreciation expense is due to capital improvements to our communities, net of communities sold.  The decrease in amortization expense is the result of certain resident contract intangible assets becoming fully amortized.

Community Lease Expense:

	Three Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Operating lease expense	$	28,425		$	26,972		$	1,453			5.4	%
Above/below market rent amortization		1,612			1,845			(233	)		(12.6	%)
Deferred straight-line rent amortization		923			2,197			(1,274	)		(58.0	%)
Community leases	$	30,960		$	31,014		$	(54	)		(0.2	%)
As a percentage of total operating revenues		8.1	%		8.3	%				(0.2) ppt

The decrease in total community lease expense resulted from a lower level of deferred straight-line rent amortization, which was partially offset by an increase in operating lease expense due to annual rent escalators.  We leased 79 and 80 communities under operating leases as of September 30, 2012 and 2011, respectively.

Costs Incurred on Behalf of Managed Communities:

	Three Months Ended September 30,
	2012			2011			$D		% D
	(in thousands, except percentages)
Costs incurred on behalf of managed communities	$	51,953		$	51,020		$	933		1.8	%
As a percentage of total operating revenues		13.6	%		13.6	%			– ppt

The increase in costs incurred on behalf of managed communities is due in part to an increase in the number of residents in our managed communities and the overall cost infrastructure to support these residents.

Interest Income:

	Three Months Ended September 30,
	2012		2011		$D			% D
	(in thousands, except percentages)
Interest income	$	101	$	121	$	(20	)		(16.5	%)
As a percentage of total operating revenues		–		–				– ppt

The Company earns interest income on invested cash balances and on restricted deposits.

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Interest Expense:

	Three Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Interest expense	$	38,451		$	41,605		$	(3,154	)		(7.6	%)
As a percentage of total operating revenues		10.1	%		11.1	%				(1.0) ppt

The decrease in interest expense was due primarily to communities disposed of since the third quarter of 2011.

Change in Fair Value of Derivative Financial Instruments

	Three Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Change in fair value of derivative financial instruments	$	(174	)	$	1,527		$	(1,701	)		N/M
As a percentage of total operating revenues		–			0.4	%				(0.4) ppt

The noncash expense in the 2012 period represents changes in the fair value of our interest rate cap purchased in October 2011.  The amount in the 2011 period represents noncash income resulting from changes in the fair value of an interest rate swap that expired on January 2, 2012.  See Note 6, Derivative Financial Instruments.

Equity Losses for Unconsolidated Joint Ventures:

	Three Months Ended September 30,
	2012			2011			$D		% D
	(in thousands, except percentages)
Net equity losses for unconsolidated joint ventures	$	(28	)	$	(817	)	$	789		N/M
As a percentage of total operating revenues		–			(0.2	%)			0.2 ppt

The equity losses in the three months ended September 30, 2012 were comprised primarily of equity losses of $123,000 from a start-up joint venture with Wegman, net of equity earnings from the other joint ventures.  The equity losses in the three months ended September 30, 2011 were comprised of equity losses of $678,000 from the Sunwest JV and equity losses of $140,000 from joint ventures with Wegman. 

The following table sets forth condensed combined statements of operations data for our unconsolidated joint ventures (in thousands, except per unit and percentages):

	Three Months Ended
	September 30,
	2012			2011
Total revenues	$	101,743		$	94,808
Community operating expenses		75,243			73,202
Operating income		16,554			4,145
Net income (loss)		1,136			(11,559	)
The Company's share of net loss	$	(28	)	$	(817	)
Average monthly revenue per occupied unit	$	3,382		$	3,253
Average occupancy rate		85.4	%		83.0	%

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Other, net:

	Three Months Ended September 30,
	2012			2011			$D		% D
	(in thousands, except percentages)
Other, net	$	743		$	312		$	431		138.1	%
As a percentage of total operating revenues		0.2	%		0.1	%			0.1 ppt

Other, net for the third quarter of 2012 consisted primarily of a gain of $277,000 on the sale of assets, amortization of deferred gains of $249,000, and resident late fee finance charges of $152,000.

Other, net for the third quarter of 2011 consisted primarily of amortization of deferred gains of $279,000, and resident late fee finance charges of $167,000.

Income Taxes:

	Three Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Provision for income taxes	$	(324	)	$	(82	)	$	(242	)		(295.1	%)
As a percentage of total operating revenues		(0.1	%)		–					(0.1) ppt

The income tax provisions for 2012 and 2011 represent estimated state income and franchise tax liabilities.

Loss from Discontinued Operations:

	Three Months Ended September 30,
	2012			2011			$D		% D
	(in thousands, except percentages)
Loss from discontinued operations	$	(2,698	)	$	(17,258	)	$	14,560		N/M
As a percentage of total operating revenues		(0.7	%)		(4.6	%)			3.9 ppt

Loss from discontinued operations for the three months ended September 30, 2012 primarily consists of losses on the sale of three communities completed during the quarter.

Loss from discontinued operations for the three months ended September 30, 2011 represents the impairment losses on five communities that we designated as held for sale in September 2011, based on purchase and sale agreements from prospective purchasers, offset in part by the gain on the sale of one community in August 2011.

See Note 8, Discontinued Operations and Note 10, Fair Value Disclosures—Impairment of Long-Lived Assets.

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Comparison of the Nine Months Ended September 30, 2012 and 2011

Net Loss Attributable to Emeritus Corporation Common Shareholders

We reported a net loss attributable to Emeritus common shareholders of $57.4 million for the nine months ended September 30, 2012, compared to a net loss of $44.0 million in the prior-year period.  The prior-period results include a $42.1 million gain on the acquisition of the Blackstone JV Communities.  As further described in the section Liquidity and Capital Resources below, the Company has incurred significant losses since its inception, but has generated annual positive cash flow from operating activities since 2001.

The details of each of the components of net loss are set forth below.

Total Operating Revenues:

	Nine Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Same Community Portfolio	$	872,264		$	862,105		$	10,159			1.2	%
Acquisitions, dispositions, development and expansion		87,399			54,860			32,539			59.3	%
Unallocated community revenue (a)		762			(2,286	)		3,048			133.3	%
Community revenue		960,425			914,679			45,746			5.0	%
Management fees		15,490			15,946			(456	)		(2.9	%)
Reimbursed costs incurred on behalf of managed communities		154,598			165,623			(11,025	)		(6.7	%)
Total operating revenues	$	1,130,513		$	1,096,248		$	34,265			3.1	%
Average monthly revenue per occupied unit	$	4,157		$	4,060		$	97			2.4	%
Average occupancy rate		86.7	%		86.2	%				0.5 ppt
(a) Comprised primarily of deferred move-in fees.

The increase of $10.2 million from the 293 Same Community Portfolio consisted of $8.0 million in improvement in the rates we charge our residents and an increase in occupancy levels of $2.2 million.  As further described in the section Same Community Comparison above, our Same Community Portfolio consists of those communities that we have continuously operated since January 1, 2011, net of dispositions.  Revenues from acquisitions, developments and expansions, which are derived from any communities that we began operating since January 1, 2011 (net of dispositions), increased by $32.5 million, due primarily to our June 1, 2011 acquisition of the 24 Blackstone JV Communities.  The change in unallocated community revenue of $3.0 million primarily resulted from an increase in the recognition of resident move-in fees, which we recognize over the average resident length of stay.

The Sunwest JV, which commenced operations in August 2010, contributed $14.2 million and $13.2 million to management fee revenues in the nine-month period ended September 30, 2012 and 2011, respectively.  The Blackstone JV contributed $1.5 million to management fee revenues in the nine months ended September 30, 2011.  As described in Note 4, Acquisitions and Other Significant Transactions—2011 Blackstone JV Acquisition, we acquired Blackstone’s equity interest in the 24 communities that we previously managed for the Blackstone JV and have included them in our Consolidated Portfolio effective on the June 1, 2011 acquisition date.  In connection with this acquisition, our management agreements with the Blackstone JV were terminated.

The decrease in reimbursed costs incurred on behalf of managed communities was due primarily to the conversion of the Blackstone JV Communities from managed to owned on June 1, 2011.

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Community Operating Expense:

	Nine Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Same Community Portfolio	$	579,579		$	574,185		$	5,394			0.9	%
Acquisitions, dispositions, development and expansion		61,326			41,041			20,285			49.4	%
Unallocated community expenses		3,082			12,586			(9,504	)		N/M
Community operations	$	643,987		$	627,812		$	16,175			2.6	%
As a percentage of total operating revenues		57.0	%		57.3	%				(0.3) ppt

Community operating expense represents direct costs incurred to operate the communities and includes costs such as payroll and benefits, resident activities, marketing, housekeeping, food service, facility maintenance, utilities, taxes, insurance, and licenses.  The increase from 2011 to 2012 was due primarily to a net increase in the number of communities in our Consolidated Portfolio in 2011 due to acquisitions, the majority of which were our June 1, 2011 acquisition of the 24 Blackstone JV Communities.  Of the $20.3 million increase in expense due to acquisitions (net of dispositions), the largest contributor was an increase in total labor and benefits of $12.7 million as well as increases in other categories required to provide services to residents.

The increase in community operating expense in our Same Community Portfolio of $5.4 million was due primarily to increases in employee recruiting and training, professional liability insurance, raw food, contracted services, and bad debt, net of decreases in salaries and benefits and utilities.  Over the last year, we undertook expense control and efficiency measures, such as an improved labor hours tracking system.  We focus on providing the appropriate level of care at our communities, while also pursuing overall expense efficiencies.

Unallocated community expenses primarily represent reserve adjustments for workers’ compensation insurance and professional and general liability insurance.  We periodically adjust our estimated self-insurance liabilities based on actuarial projected losses, representing our revised estimates of the ultimate exposure under the Company’s self-insurance programs.  On a consolidated basis, in the 2011 period, we recorded $10.4 million in expenses to increase the accrual for professional and general self-insurance for prior-years’ claims exposure.  Of this amount, $8.5 million was recorded in the 2011 third quarter, which was based on the progression of open claims during the quarter, including an unfavorable jury verdict, as well as recent settlement activity.

General and Administrative Expense:

	Nine Months Ended September 30,
	2012			2011			$D		% D
	(in thousands, except percentages)
General and administrative	$	69,492		$	66,605		$	2,887		4.3	%
As a percentage of total operating revenues		6.1	%		6.1	%			– ppt

The increase in general and administrative expenses primarily reflects increases in employee compensation, including noncash stock compensation expense.

General and administrative expense as a percentage of community operating revenues for all managed and consolidated communities was unchanged at 5.4% for the nine-month periods ended September 30, 2012 and 2011.  We focus on overhead expense efficiencies, while ensuring adequate infrastructure to support our operational needs.  For example, in the first half of 2011 we eliminated certain processes and related positions that were deemed to duplicate or be less efficient than similar processes performed elsewhere within the organization.  As a result, salaries and wages and related taxes and benefits were consistent with the prior-year period.

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We compute these percentages as follows:

	Nine Months Ended September 30,
	2012					2011
	(in thousands, except percentages)
General and administrative expenses			$	69,492				$	66,605
Sources of revenue:
Owned and leased	$	960,425				$	914,679
Managed		316,202					327,720
Total revenue for all communities in our Operated Portfolio			$	1,276,627				$	1,242,399
General and administrative expenses as a percent of
all sources of community revenue				5.4	%				5.4	%
General and administrative expenses less stock-based
compensation as a percent of all sources of community revenue				4.8	%				4.8	%

Transaction Costs:

	Nine Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Transaction costs	$	2,480		$	9,085		$	(6,605	)		(72.7	%)
As a percentage of total operating revenues		0.2	%		0.8	%				(0.6) ppt

Transaction costs in the prior period included $6.2 million for our purchase of rights related to six of 18 communities included in the cash flow sharing agreement we entered into with Mr. Baty (see Note 4, Acquisitions and Other Significant Transactions—2011 Contract Buyout Agreement) and $1.2 million related to the acquisition of the Blackstone JV Communities.  The remaining costs in both periods primarily represented professional and consulting fees incurred related to community purchases and other acquisition activity.

Impairment of Long-Lived Assets:

The impairment charge of $2.1 million in the nine-month period ended September 30, 2012 represents the write-down to fair value of two parcels of undeveloped land that we plan to sell (see Note 10, Fair Value Disclosures—Impairment of Long-Lived Assets).

Depreciation and Amortization Expense:

	Nine Months Ended September 30,
	2012			2011			$D		% D
	(in thousands, except percentages)
Depreciation and amortization	$	98,024		$	90,065		$	7,959		8.8	%
As a percentage of total operating revenues		8.7	%		8.2	%			0.5 ppt

The increase in depreciation and amortization expense represents an increase in depreciation expense of $4.8 million and an increase in amortization expense of $3.1 million.  The increased depreciation expense is due to the increase in the number of communities in our consolidated portfolio in 2011, including the 24 Blackstone JV Communities, as well as depreciation on capital improvements to our existing communities.  The increase in amortization expense is the result of resident contract intangible assets acquired in business combinations, including the Blackstone JV Communities (see Note 4, Acquisitions and Other Significant Transactions—2011 Blackstone JV Acquisition).

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Community Lease Expense:

	Nine Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Operating lease expense	$	84,936		$	80,305		$	4,631			5.8	%
Above/below market rent amortization		4,990			5,778			(788	)		(13.6	%)
Deferred straight-line rent amortization		3,221			7,129			(3,908	)		(54.8	%)
Community leases	$	93,147		$	93,212		$	(65	)		(0.1	%)
As a percentage of total operating revenues		8.2	%		8.5	%				(0.3) ppt

The decrease in total community lease expense reflected an increase in operating lease expense due to rent escalators, which was offset in part by deferred straight-line rent amortization.  We leased 79 and 80 communities under operating leases as of September 30, 2012 and 2011, respectively.

Costs Incurred on Behalf of Managed Communities:

	Nine Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Costs incurred on behalf of managed communities	$	154,598		$	165,623		$	(11,025	)		(6.7	%)
As a percentage of total operating revenues		13.7	%		15.1	%				(1.4) ppt

The decrease in costs incurred on behalf of managed communities was due primarily to the conversion of the Blackstone JV Communities from managed to owned on June 1, 2011, offset by increased costs to support more residents at the remaining managed communities.

Interest Income:

	Nine Months Ended September 30,
	2012		2011		$D			% D
	(in thousands, except percentages)
Interest income	$	303	$	355	$	(52	)		(14.6	%)
As a percentage of total operating revenues		–		–				– ppt

We earn interest income on invested cash balances and on restricted deposits.

Interest Expense:

	Nine Months Ended September 30,
	2012			2011			$D		% D
	(in thousands, except percentages)
Interest expense	$	116,083		$	115,844		$	239		0.2	%
As a percentage of total operating revenues		10.3	%		10.6	%			(0.3) ppt

The increase in interest expense was due primarily to communities acquired in 2011, including the 24 Blackstone JV Communities, net of community dispositions.

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Change in Fair Value of Derivative Financial Instruments

	Nine Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Change in fair value of derivative financial instruments	$	(919	)	$	2,036		$	(2,955	)		N/M
As a percentage of total operating revenues		(0.1	%)		0.2	%				(0.3) ppt

The noncash expense in the 2012 period represents changes in the fair value of our interest rate cap purchased in October 2011.  The amount in the 2011 period represents noncash income resulting from changes in the fair value of an interest rate swap that expired on January 2, 2012.  See Note 6, Derivative Financial Instruments.

Equity Losses for Unconsolidated Joint Ventures:

	Nine Months Ended September 30,
	2012			2011			$D		% D
	(in thousands, except percentages)
Net equity losses for unconsolidated joint ventures	$	(500	)	$	(1,252	)	$	752		60.1	%
As a percentage of total operating revenues		–			(0.1	%)			0.1 ppt

The equity losses in the nine months ended September 30, 2012 were comprised primarily of equity losses of $360,000 from the Sunwest JV and $123,000 from a start-up joint venture with Wegman.  As described in Note 4, Acquisitions and Other Significant Transactions—2011 Blackstone JV Acquisition, we acquired the 24 communities that we previously managed for the Blackstone JV and have included them in our Consolidated Portfolio effective on the June 1, 2011 acquisition date.  The equity losses in the nine months ended September 30, 2011 consisted primarily of equity losses of $2.1 million from the Sunwest JV, partially offset by equity earnings of $921,000 from the Blackstone JV.

The following table sets forth condensed combined statements of operations data primarily for our unconsolidated joint ventures (in thousands except per unit and percentages):

	Nine Months Ended
	September 30,
	2012			2011
Total revenues	$	299,892		$	312,704
Community operating expenses		221,441			238,843
Operating income		37,772			18,818
Net loss		(6,475	)		(28,303	)
The Company's share of net loss	$	(500	)	$	(1,252	)
Average monthly revenue per occupied unit	$	3,344		$	3,341
Average occupancy rate		84.7	%		81.7	%

Acquisition Gain

	Nine Months Ended September 30,
	2012		2011			$D			% D
	(in thousands, except percentages)
Acquisition gain	$	–	$	42,110		$	(42,110	)		N/M
As a percentage of total operating revenues		–		3.8	%				(3.8) ppt

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The $42.1 million acquisition gain resulted from our remeasurement at fair value of our previously existing equity investment in the Blackstone JV when we acquired Blackstone’s equity interest in June 2011.  See Note 4, Acquisitions and Other Significant Transactions—2011 Blackstone JV Acquisition for further detail.

Other, net:

	Nine Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Other, net	$	1,624		$	2,774		$	(1,150	)		(41.5	%)
As a percentage of total operating revenues		0.1	%		0.3	%				(0.2) ppt

Other, net for the first nine months of 2012 consisted primarily of amortization of deferred gains of $782,000, gains on the sale of assets of $325,000, and resident late fee finance charges of $431,000.

Other, net for the first nine months of 2011 consisted primarily of the gain on the sale of investment securities of $1.6 million, amortization of deferred gains of $851,000, and resident late fee finance charges of $440,000.

Income Taxes:

	Nine Months Ended September 30,
	2012			2011			$D			% D
	(in thousands, except percentages)
Provision for income taxes	$	(920	)	$	(657	)	$	(263	)		(40.0	%)
As a percentage of total operating revenues		(0.1	%)		(0.1	%)				– ppt

The income tax provisions in 2012 and 2011 represent estimated state income and franchise tax liabilities.

Loss from Discontinued Operations:

	Nine Months Ended September 30,
	2012			2011			$D		% D
	(in thousands, except percentages)
Loss from discontinued operations	$	(7,705	)	$	(17,655	)	$	9,950		56.4	%
As a percentage of total operating revenues		(0.7	%)		(1.6	%)			0.9 ppt

Loss from discontinued operations for the nine months ended September 30, 2012 primarily consisted of losses on four communities sold during the period.

Loss from discontinued operations for the nine months ended September 30, 2011 included $17.5 million of impairment losses on five communities that we designated as held for sale in September 2011, based on purchase and sale agreements from prospective purchasers, as well as net losses on the sale of two communities in May 2011 and one community in August 2011.  See Note 8, Discontinued Operations and Note 10, Fair Value Disclosures—Impairment of Long-Lived Assets.

Liquidity and Capital Resources

The United States economy experienced a significant decline in the housing market, significant declines in consumer confidence, and a related weakness in the availability and affordability of credit during 2008 that led to the economic recession that continued into 2009 with only moderate signs of a recovery during 2010, 2011, and 2012.  However, we believe that the need-driven demand for our services continues to grow and remains resilient due, in large part, to an increasingly aging population as well as limited new senior living construction, as evidenced by our improvements in same community occupancy and average rates.

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As of September 30, 2012, we had cash and equivalents on hand of $97.4 million compared to $43.7 million at December 31, 2011.

The Company has incurred significant operating losses since its inception, and we had working capital deficits of $72.1 million and $100.1 million as of September 30, 2012 and December 31, 2011, respectively.  Due to the nature of our business, it is not unusual to operate in the position of a working capital deficit because we collect revenues much more quickly, often in advance, than we are required to pay obligations, and we have historically refinanced or extended maturities of debt obligations as they become current liabilities.  Our operations result in a very low level of current assets to the extent cash has been deployed in business development opportunities or to pay down long-term liabilities.  Along those lines, the working capital deficit as of September 30, 2012 included a $20.7 million deferred tax asset and, as part of current liabilities, $34.0 million of deferred revenue and unearned rental income.  A $20.7 million deferred tax liability is included in other long-term liabilities.  We do not expect the level of current liabilities to change from period to period in such a way as to require the use of significant cash, except for $29.1 million in balloon payments of principal on long-term debt maturing during the next 12 months, which is included in current portion of long-term debt as of September 30, 2012.  We intend to refinance, extend, or retire these obligations prior to their maturities.  Given the continuing instability in worldwide credit markets, there can be no assurance that we will be able to obtain such refinancing or be able to retire the obligations.

Sources and Uses of Cash

We expect to use our cash to invest in our core business as well as other new business opportunities related to our core business.  As discussed above, we expect to refinance or extend our balloon payments of debt principal in the next 12 months; however, if we are unable to do so, we believe the Company would be able to generate sufficient cash flows to support its operating and investing activities and financing obligations for at least the next 12 months by conserving its capital expenditures and operating expenses or selling communities or a combination thereof.  In connection with Emeritus’ guarantees of certain debt and lease agreements, we are required at all times to maintain a minimum $20.0 million balance of unencumbered liquid assets, defined as cash, cash equivalents and/or publicly traded/quoted marketable securities.  As a result, $20.0 million of our cash on hand is not available to fund operations and we take this into account in our cash management activities.

We may use our available cash resources to seek strategic acquisitions to leverage existing capabilities and further build our business in support of our growth strategy.  Significant acquisitions and/or other new business opportunities will likely require additional outside funding.  We do not plan to pay cash dividends to our common shareholders in the foreseeable future.

Other than normal operating expenses, we expect that cash requirements for the next 12 months will consist primarily of capital expenditures and new business opportunities.  We expect to increase expenditures for remodeling and refurbishment of existing communities, systems and technology investments in the communities and in the support infrastructure.

The following is a summary of cash flow information for the periods indicated (in thousands):

	Nine Months Ended September 30,
	2012			2011
Cash provided by operating activities	$	110,621		$	63,753
Cash used in investing activities		(5,445	)		(185,808	)
Cash provided by (used in) financing activities		(51,493	)		72,684
Net increase (decrease) in cash and cash equivalents		53,683			(49,371	)
Cash and cash equivalents at the beginning of the period		43,670			110,124
Cash and cash equivalents at the end of the period	$	97,353		$	60,753

In the first nine months of 2012 and in each of the previous years since 2001, we reported positive net cash from operating activities in our consolidated statements of cash flows.

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We used cash in investing activities during the first nine months of 2012 primarily for capital expenditures, partially offset by proceeds from the sale of four communities during the year.  We used cash in investing activities during the first nine months of 2011 primarily for the acquisition of the Blackstone JV Communities, which amounted to $97.2 million (net of $4.2 million of cash acquired and including $58.6 million from additional borrowings), the purchase of six other communities, which amounted to $83.0 million, and capital expenditures of $23.1 million, partially offset by proceeds from the sale of investment securities of $16.3 million.

In the first nine months of 2012, we used cash in financing activities primarily for the repayment of debt and lease obligations.  In the prior-year period, we borrowed $121.0 million to purchase communities, of which $58.6 million was related to the Blackstone JV acquisition, and $47.2 million to refinance existing debt.  We also used cash in financing activities in the prior-year period primarily for principal payments, debt refinancings, and early retirement of long-term debt, as well as principal payments on capital leases.  In addition, in the prior-year period we paid $4.1 million to purchase Mr. Baty’s equity interest in certain communities previously owned by our consolidated joint venture (see Note 4, Acquisitions and Other Significant Transactions—2011 Contract Buyout Agreement).

As of September 30, 2012, the Company had payment obligations for long-term debt and capital and financing leases due during the next 12 months totaling approximately $80.9 million.

Payment Commitments

The following table summarizes our contractual obligations as of September 30, 2012 (in thousands):

	Principal Due by Period
									More than
Contractual Obligations	Total		1 year (a)		2-3 years		4-5 years		5 years
Long-term debt, including current portion	$	1,567,349	$	57,586	$	230,096	$	488,806	$	790,861
Capital and financing leases including current portion		641,091		23,348		68,129		93,282		456,332
Operating leases		880,803		112,544		230,974		229,554		307,731
Liability related to unrecognized tax benefits (b)		422		–		–		–		–
	$	3,089,665	$	193,478	$	529,199	$	811,642	$	1,554,924

(a)  Represents all payments due within one year, including balloon payments described elsewhere in this Form 10-Q.

(b)  We have recognized total liabilities related to unrecognized tax benefits of $422,000 as of September 30, 2012.  The timing of payments related to these obligations is uncertain; however, we do not expect to pay any of this amount within the next year.

The following table summarizes interest on our contractual obligations as of September 30, 2012 (in thousands):

	Interest Due by Period
									More than
Contractual Obligations	Total		1 year		2-3 years		4-5 years		5 years
Long-term debt	$	483,561	$	96,189	$	172,028	$	141,954	$	73,390
Capital and financing lease obligations		402,744		50,125		95,985		84,327		172,307
	$	886,305	$	146,314	$	268,013	$	226,281	$	245,697

The amounts above do not include our direct and indirect guarantees of the construction loans payable by two Wegman joint ventures; Deerfield and Vestal.  Emeritus has a 50% ownership interest in these joint ventures and we account for them as unconsolidated equity method investments.  As of September 30, 2012, the loan balance for Deerfield was $8.3 million with variable rate interest at LIBOR (floor of 1.0%) plus 3.50%.  Emeritus and Wegman have each provided to the lender an unconditional guarantee of payment of this loan.  As of September 30, 2012, the loan balance for Vestal was $5.2 million with a variable interest rate at LIBOR (floor of 1.5%) plus 4%.  Wegman has provided an unconditional guarantee of payment to the lender and is indemnified by Emeritus through a separate agreement.  In the event that we would be required to repay either of these loans, our share of the obligation would be 50%.

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Financial Covenants and Cross-Defaults

Many of our debt instruments, leases and corporate guarantees contain financial covenants that require that the Company maintain specified financial criteria as of the end of each reporting period.  These financial covenants generally prescribe operating performance metrics such as debt or lease coverage ratios, operating income yields, fixed-charge coverage ratios and/or minimum occupancy requirements.  Others are based on financial metrics such as minimum cash or net worth balances or have material adverse change clauses.  Remedies available to the counterparties to these arrangements in the event of default vary, but include the requirement to post a security deposit in specified amounts, acceleration of debt or lease payments, and/or the termination of related lease agreements.

In addition, many of the lease and debt instruments contain cross-default provisions whereby a default under one obligation can cause a default under one or more other obligations.  Accordingly, an event of default could have a material adverse effect on our financial condition if a lender or landlord exercised its rights under an event of default.

As of September 30, 2012, the Company has approximately $1.6 billion outstanding of mortgage debt and notes payable comprised of the following:

·   Mortgage debt financed through Freddie Mac and Fannie Mae of approximately $1.1 billion, or approximately 70.9% of our total debt outstanding.  These obligations were incurred to facilitate community acquisitions over the past few years, were issued to single purpose entities (each an “SPE”) and are secured by the assets of each SPE, which consist of the real and personal property and intangible assets of a single community.  The debt is generally nonrecourse debt to the Company in that only the assets or common stock of each SPE are available to the lender in the event of default, with some limited exceptions.  These debt obligations do not contain provisions requiring ongoing maintenance of specific financial covenants, but do contain typical events of default such as nonpayment of monetary obligations, failure to maintain insurance coverage, fraud and/or misrepresentation of facts, unauthorized sale or transfer of assets, and the institution of legal proceedings under bankruptcy.  These debt instruments typically contain cross-default provisions, which are limited to other related loans provided by the specific lender.  Remedies under an event of default include the acceleration of payment of the related obligations.

·   Mortgage debt financed primarily through traditional financial lending institutions of approximately $344.4 million, or approximately 22.0% of our total debt outstanding.  These obligations were incurred to facilitate community acquisitions over the past few years, were typically issued to and secured by the assets of each SPE, which consist of the real and personal property and intangible assets of a single community.  The debt is generally recourse debt to the Company in that not only are the assets or common stock of each SPE available to the lender in the event of default, but the Company has guaranteed performance of each SPE’s obligations under the mortgage.  These debt obligations generally contain provisions requiring ongoing maintenance of specific financial covenants, such as debt service coverage ratios, operating income yields, occupancy requirements, and/or net operating income thresholds.  Our guarantees generally contain requirements to maintain minimum cash and/or net worth balances.  In addition, the mortgages contain other typical events of default such as nonpayment of monetary obligations, failure to maintain insurance coverage, fraud and/or misrepresentation of facts, unauthorized sale or transfer of assets, and the institution of legal proceedings under bankruptcy.  These debt instruments may contain cross-default provisions, but are limited to other loans provided by the specific lender.  Remedies under an event of default include the acceleration of payment of the related obligations.

·   Mezzanine debt financing in the amount of $111.3 million provided by real estate investment trusts (“REIT”s) to facilitate community acquisitions, or approximately 7.1% of our total debt outstanding.  These obligations are generally unsecured or are secured by mortgages on leasehold interests on community lease agreements between the specific REIT and the Company, and performance under the debt obligations are guaranteed by the Company.  Our guaranty generally contains a requirement to maintain minimum cash and/or net worth balances.  Typical events of default under these obligations include nonpayment of

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   monetary obligations, events of default under related lease agreements, and the institution of legal proceedings under bankruptcy.  Remedies under an event of default include the acceleration of payments of the related obligations.

As of September 30, 2012, we operated 140 communities under long-term lease arrangements, of which 116 were leased from publicly traded REITs.  Of the 140 leased properties, 50 contain provisions requiring ongoing maintenance of specific financial covenants, such as rent coverage ratios.  Other typical events of default under these leases include nonpayment of rents or other monetary obligations, events of default under related lease agreements, and the institution of legal proceedings under bankruptcy.  Remedies in these events of default vary, but generally include the requirement to post a security deposit in specified amounts, acceleration of lease payments, and/or the termination of the related lease agreements.   As of September 30, 2012, we were in violation of financial covenants in a debt agreement covering two communities with an aggregate outstanding principal balance of $14.1 million. This loan matures in November 2012 and we are in negotiations to refinance it.  In addition, we were in violation of financial covenants in a lease agreement covering one community.  We obtained waivers from the lender and lessor through September 30, 2012 and, as such, are in compliance as of that date.  As required, we will test for compliance again on the next measurement date of December 31, 2012.  

Off-Balance Sheet Arrangements

We currently have no off-balance sheet arrangements other than community operating leases.  For additional information on the community operating leases, see the discussions of Community Lease Expense contained elsewhere in this section.

Significant Accounting Policies and Use of Estimates

Significant accounting policies are those that we believe are both most important to the portrayal of our financial condition and results of operations, and require our most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  Judgments and uncertainties affecting the application of those policies may result in our reporting materially different amounts under different conditions or using different assumptions.

We believe that our accounting policies regarding investments in joint ventures, asset impairments, goodwill impairment, stock-based compensation, leases, self-insurance reserves, and income taxes are the most critical in understanding the judgments involved in our preparation of our financial statements.  Those financial statements reflect our revisions to such estimates in income during the period in which the facts that give rise to the revision become known.  For a summary of all of our significant accounting policies, see Note 1, Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies in the Notes to Consolidated Financial Statements in our 2011 Annual Report on Form 10-K.

Investments in Joint Ventures

We have investments in joint ventures with equity interests ranging from 6.0% to 51.0%.  Generally accepted accounting principles (“GAAP”) requires that at the time we enter into a joint venture, we must determine whether the joint venture is a variable interest entity and if so, whether we are the primary beneficiary and thus required to consolidate the entity.  In performing this analysis, we consider various factors such as the amount of our ownership interest, our voting rights, the extent of our power to direct matters that significantly impact the entity’s activities, and our participating rights.  We must also reevaluate each joint venture’s status quarterly or whenever there is a change in circumstances such as an increase in the entity’s activities, assets, or equity investments, among other things.

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Asset Impairments

When facts and circumstances indicate that the carrying values of long-lived assets may not be recoverable, we evaluate long-lived assets for impairment.  We first compare the carrying value of the asset to the asset’s estimated future cash flows (undiscounted). If the estimated future cash flows are less than the carrying value of the asset, we calculate an impairment loss based on the asset’s estimated fair value.  For community assets, the fair value of the assets is estimated using a discounted cash flow model based on future revenues and operating costs, using internal projections.  For our investments in unconsolidated joint ventures, we determine whether there has been an other-than-temporary decline in the carrying value of the investment by using a discounted cash flow model to estimate the fair value of individual assets inside the joint venture.  For our investments in marketable equity securities, we must make a judgment as to whether a decline in fair value is other-than-temporary.  For other assets, we use the valuation approach that is appropriate given the relevant facts and circumstances.

Our impairment loss calculations contain uncertainties because they require management to make assumptions and to apply judgment to estimate future cash flows and asset fair values, including forecasting asset useful lives.  Further, our ability to realize undiscounted cash flows in excess of the carrying values of our assets is affected by factors such as the ongoing maintenance and improvement of the assets, changes in economic conditions, and changes in operating performance.  As we periodically reassess estimated future cash flows and asset fair values, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.

Goodwill Impairment

We test goodwill for impairment on an annual basis, or more frequently if circumstances indicate that goodwill carrying values may exceed their fair values.  If the carrying amount of goodwill exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value.

In 2011, we early adopted Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”).  This revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing companies with the option of performing a “qualitative” assessment to determine whether a further impairment test is necessary.  As a result, we first assess a range of qualitative factors including, but not limited to, macroeconomic conditions, industry conditions, the competitive environment, changes in the market for our products and services, regulatory and political developments, and entity specific factors such as strategies and financial performance when evaluating potential impairment for goodwill.  If, after completing such assessment, it is determined that it is “more likely than not” that the fair value of a reporting unit is less than its carrying value, we proceed to a two-step impairment test, whereby the first step is comparing the fair value of a reporting unit with its carrying amount, including goodwill.  If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered to not be impaired and the second step of the test is not performed.  The second step of the impairment test is performed when the carrying amount of the reporting unit exceeds the fair value, in which case the implied fair value of the reporting unit goodwill is compared with the carrying amount of that goodwill.  If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the excess.

Emeritus is comprised of a single reporting unit.  We performed our qualitative assessment as of October 31, 2011 and determined that it was not “more likely than not” that the fair value of our reporting unit was less than its applicable carrying value. Accordingly, it was not necessary to perform the two-step impairment test and no goodwill impairment was recognized in 2011.  We also noted that there were no facts or circumstances during the first nine months of 2012 that indicated that our carrying value exceeded the estimated fair value of the Company as of September 30, 2012.

Our impairment loss assessment contains uncertainties because it requires us to apply judgment to estimate whether there has been a decline in the fair value of our Company reporting unit, including estimating future cash flows, and if necessary, the fair value of our assets and liabilities.  As we periodically perform this assessment, changes in our estimates and assumptions may cause us to realize material impairment charges in the future.

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Stock-Based Compensation

We measure the fair value of stock awards at the grant date based on the fair value of the award and recognize the expense over the related service period.  For stock option awards, we use the Black-Scholes option pricing model, which requires the input of subjective assumptions.  These assumptions include estimating the length of time employees will retain their stock options before exercising them (“expected term”), the estimated volatility of our common stock price over the expected term and the expected dividend yield.  In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those stock awards expected to vest.  We estimate the forfeiture rate based on historical experience.  Changes in our assumptions could materially affect the estimate of fair value of stock-based compensation; however, a 10.0% change in our critical assumptions including volatility and expected term would not have a material impact for fiscal year 2012.

The Company’s restricted stock awards vest only upon the achievement of performance targets.  GAAP requires recognition of compensation cost only when achievement of performance conditions is considered probable.  Consequently, our determination of the amount of stock compensation expense requires a significant level of judgment in estimating the probability of achievement of these performance targets.  Additionally, we must make estimates regarding employee forfeitures in determining compensation expense.  Subsequent changes in actual experience are monitored and estimates are updated as information is available.

Leases

We determine whether to account for our leases as operating, capital, or financing leases depending on the underlying terms.  As of September 30, 2012, we operated 140 communities under long-term leases with operating, capital, and financing lease obligations.  The determination of this classification under GAAP is complex and in certain situations requires a significant level of judgment.  Our classification criteria is based on estimates regarding the fair value of the leased communities, minimum lease payments, effective cost of funds, the economic life of the community, and certain other terms in the lease agreements.

Self-Insurance Reserves

We use a combination of insurance and self-insurance mechanisms to provide for the potential liabilities for certain risks, including workers’ compensation, healthcare benefits, professional and general liability, property insurance, and director and officers’ liability insurance.

We are self-insured for professional liability risk with respect to 233 of the 323 communities in our Consolidated Portfolio.  The liability for self-insured incurred but not yet reported claims was $23.6 million and $22.2 million at September 30, 2012 and December 31, 2011, respectively.  We believe that the range of reasonably possible losses as of September 30, 2012, based on sensitivity testing of the various underlying actuarial assumptions, is approximately $22.4 million to $31.7 million.  The high end of the range reflects the potential for high-severity losses.

We are self-insured for workers’ compensation risk (except in Texas, Washington, and Ohio) up to $500,000 per claim through a high deductible, collateralized insurance program.  The liability for self-insured incurred but not yet reported claims was $30.5 million and $26.3 million at September 30, 2012 and December 31, 2011, respectively,which is included in accrued employee compensation and benefits in the condensed consolidated balance sheets  We believe that the range of reasonably possible losses as of September 30, 2012, based on sensitivity testing of the various underlying actuarial assumptions, is approximately $28.3 million to $33.8 million.

For health insurance, we self-insure each participant up to $350,000 per year above which a catastrophic insurance policy covers any additional costs.  The liability for self-insured incurred but not yet reported claims is included in accrued employee compensation and benefits in the condensed consolidated balance sheets and was $11.4 million and $9.5 million at September 30, 2012 and December 31, 2011, respectively.  A 10.0% change in the estimated liability at September 30, 2012 would have increased or decreased Operated Portfolio expenses during the current period by approximately $1.1 million.  We share any revisions to prior estimates with the communities participating

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in the insurance programs, including those that we manage for third parties such as the Sunwest JV, based on their proportionate share of any changes in estimates.  Accordingly, the impact of changes in estimates on our consolidated income from operations would be less sensitive than the difference indicated above.

Liabilities associated with the risks that are retained by Emeritus are not discounted and we estimate them, in part, by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions.  For professional liability and workers’ compensation claims, we engage third-party actuaries to assist us in estimating the related liabilities.  In doing so, we record liabilities for estimated losses for both known claims and incurred but not reported claims.  These estimates are based on historical paid and incurred losses and ultimate losses using several actuarial methods.  The estimated accruals for these liabilities could be significantly affected if future occurrences and claims differ from these assumptions and historical trends.  Changes in self-insurance reserves are recorded as an increase or decrease to expense in the period that the determination is made.

In March 2010, Congress enacted health care reform legislation, referred to as the Affordable Care Act (“ACA”), which we believe will increase our costs to provide healthcare benefits.  The specific provisions of the ACA will be phased in over time through 2018, unless modifying legislation is passed before some of the provisions become effective.  The ACA did not have a material financial impact on our Company in the first nine months of 2012.  However, we could see significant cost increases beginning in 2014 when certain provisions of the legislation are required to be implemented.

Income Taxes

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the respective tax bases of our assets and liabilities.  Deferred tax assets and liabilities are measured using current enacted tax rates expected to apply to taxable income during the years in which we expect the temporary differences to reverse.  We routinely evaluate the likelihood of realizing the benefit of our deferred tax assets and record a valuation allowance if, based on all available evidence, we determine that some portion of the tax benefit will not be realized.  As of September 30, 2012, we have established a valuation allowance such that our net deferred tax asset is zero.

We evaluate our exposures associated with our various tax filing positions and record a related liability.  We adjust our liability for unrecognized tax benefits and income tax provision in the period in which an uncertain tax position is effectively settled, the statute of limitations expires for the relevant taxing authority to examine the tax position, or when more information becomes available.

Deferred tax asset valuation allowances and our liability for unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits, and our particular facts and circumstances.  We believe that our estimates are reasonable; however, actual results could differ from these estimates.

Impact of Inflation

Inflation could affect our future revenues and operating income due to our dependence on the senior resident population, most of whom rely on relatively fixed incomes to pay for our services.  The monthly charges for the resident's unit and assisted living services are influenced by the location of the community and local competition.  Our ability to increase revenues in proportion to increased operating expenses may be limited.  We typically do not rely to a significant extent on governmental reimbursement programs, which accounted for approximately 12.5% of revenues for the nine months ended September 30, 2012.  In pricing our services, we attempt to anticipate inflation levels, but there can be no assurance that we will be able to respond to inflationary pressures in the future.  The near-term negative economic outlook in the United States may impact our ability to raise prices.  In recent years, inflation has not had a material impact on our financial position, revenues, income from continuing operations, or cash flows.  We do not expect inflation affecting the U.S. dollar to materially impact our financial position, results of operations, or cash flows in the foreseeable future.

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Non-GAAP Measures

A non-GAAP financial measure is generally defined as one that purports to measure historical financial position, results of operations, or cash flows but excludes or includes amounts that would not be excluded or included in most measures under GAAP.

Definition of Adjusted EBITDA:

We define Adjusted EBITDA as net income (loss) adjusted for the following items:

·   Depreciation and amortization;

·   Interest income;

·   Interest expense;

·   Net equity earnings or losses for unconsolidated joint ventures;

·   Provision for income taxes;

·   Certain noncash revenues and expenses; and

·   Acquisition, development, and financing expenses.

We define Adjusted EBITDAR as Adjusted EBITDA plus community lease expense, net of amortization of above/below market rents and deferred straight-line rent.

Management’s Use of Adjusted EBITDA/EBITDAR:

Adjusted EBITDA/EBITDAR are commonly used performance metrics in the senior living industry.  We use Adjusted EBITDA/EBITDAR to assess our overall financial and operating performance.  We believe these non-GAAP measures, as we have defined them, are useful in identifying trends in our financial performance because they exclude items that have little or no significance to our day-to-day operations.  These measures provide an assessment of controllable expenses and afford management the ability to make decisions, which are expected to facilitate meeting current financial goals, as well as achieve optimal financial performance.  These measures also provide indicators for management to determine if adjustments to current spending levels are needed.

Adjusted EBITDA/EBITDAR provide us with measures of financial performance, independent of items that are beyond the control of management in the short-term, such as depreciation and amortization, taxation, interest expense, and lease expense associated with our capital structure.  These metrics measure our financial performance based on operational factors that management can influence in the short-term, namely the cost structure or expenses of the organization.  Adjusted EBITDA/EBITDAR are some of the metrics used by senior management to review the financial performance of the business on a monthly basis and are used by research analysts and investors to evaluate the performance and value of the companies in our industry.

Limitations of Adjusted EBITDA/EBITDAR:

Adjusted EBITDA/EBITDAR have limitations as analytical tools.  Material limitations in making the adjustments to our losses to calculate Adjusted EBITDA/EBITDAR and using this non-GAAP financial measure as compared to GAAP net loss include:

·   The items excluded from the calculation of Adjusted EBITDA/EBITDAR generally represent income or expense items that may have a significant effect on our financial results;

·   Items determined to be non-recurring in nature could, nevertheless, re-occur in the future; and

·   Depreciation, while not directly affecting our current cash position, does represent wear and tear and/or reduction in value of our properties.  If the cost to maintain our properties exceeds our expected routine capital expenditures, then this could affect our ability to attract and retain long-term residents at our communities.

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An investor or potential investor may find this important in evaluating our financial position and results of operations.  We use these non-GAAP measures to provide a more complete understanding of the factors and trends affecting our business.

Adjusted EBITDA/EBITDAR are not alternatives to net loss, loss from continuing operations, or cash flows provided by operating activities as calculated and presented in accordance with GAAP.  You should not rely on Adjusted EBITDA/EBITDAR as substitutes for any such GAAP financial measure.  We strongly urge you to review the reconciliation of GAAP net income (loss) to Adjusted EBITDA/EBITDAR presented below, along with our condensed consolidated balance sheets, statements of operations, and statements of cash flows.  In addition, because Adjusted EBITDA/EBITDAR are not measures of financial performance under GAAP and are susceptible to varying calculations, these measures as presented may differ from and may not be comparable to similarly titled measures used by other companies.

The table below shows the reconciliation of net income (loss) to Adjusted EBITDA/EBITDAR for the three months and nine months ended September 30, 2012 and 2011 (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net loss	$	(16,402	)	$	(43,705	)	$	(57,550	)	$	(44,287	)
Depreciation and amortization		32,461			32,540			98,024			90,065
Interest income		(101	)		(121	)		(303	)		(355	)
Interest expense		38,451			41,605			116,083			115,844
Net equity losses for unconsolidated joint ventures		28			817			500			1,252
Provision for income taxes		324			82			920			657
Loss from discontinued operations		2,698			17,258			7,705			17,655
Amortization of above/below market rents		1,612			1,845			4,990			5,778
Amortization of deferred gains		(249	)		(279	)		(782	)		(851	)
Stock-based compensation		2,640			2,173			8,319			6,882
Change in fair value of derivative financial instruments		174			(1,527	)		919			(2,036	)
Deferred revenue		(305	)		1,145			(755	)		2,285
Deferred straight-line rent		923			2,197			3,221			7,129
Contract buyout costs		–			–			–			6,256
Impairment of long-lived assets		–			–			2,135			–
Gain on sale of investments		–			–			–			(1,569	)
Acquisition gain		–			–			–			(42,110	)
Acquisition, development, and financing expenses		1,339			828			2,772			3,298
Self-insurance reserve adjustments		190			8,605			2,436			11,778
Adjusted EBITDA		63,783			63,463			188,634			177,671
Community lease expense, net		28,425			26,972			84,936			80,305
Adjusted EBITDAR	$	92,208		$	90,435		$	273,570		$	257,976

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The table below shows the reconciliation of Adjusted EBITDAR to net cash provided by operating activities for the periods indicated (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Adjusted EBITDAR	$	92,208		$	90,435		$	273,570		$	257,976
Interest income		101			121			303			355
Interest expense		(38,451	)		(41,605	)		(116,083	)		(115,844	)
Provision for income taxes		(324	)		(82	)		(920	)		(657	)
Amortization of loan fees		785			806			2,465			2,280
Allowance for doubtful receivables		2,658			1,332			7,883			5,839
Changes in operating assets and liabilities, net		14,467			30,025			31,740			10,232
Contract buyout costs		–			–			–			(6,256	)
Acquisition, development, and financing expenses		(1,254	)		(828	)		(2,731	)		(3,298	)
Self-insurance reserve adjustments		(190	)		(8,605	)		(2,436	)		(11,778	)
Operating lease expense		(28,425	)		(26,972	)		(84,936	)		(80,305	)
Discontinued operations cash component		(111	)		(26	)		(111	)		(39	)
Other		641			1,682			1,877			5,248
Net cash provided by operating activities	$	42,105		$	46,283		$	110,621		$	63,753

Definition of Cash From Facility Operations:

We define Cash From Facility Operations (“CFFO”) as net cash provided by operating activities adjusted for:

·   Changes in operating assets and liabilities, net;

·   Contract buyout costs;

·   Repayment of capital lease and financing obligations;

·   Recurring capital expenditures; and

·   Distributions from unconsolidated joint ventures, net.

We define CFFO, as adjusted, as CFFO adjusted for self-insurance reserve adjustments related to prior years and unusual income tax benefits.

Recurring routine capital expenditures include expenditures capitalized in accordance with GAAP that are funded from CFFO.  Amounts excluded from recurring routine capital expenditures consist primarily of community acquisitions, including expenditures incurred in the months immediately following acquisition, new construction and expansions, computer hardware and software purchases, and purchases of vehicles.

Management’s Use of Cash From Facility Operations

We use CFFO to assess our overall liquidity and to determine levels of executive compensation.  This measure provides an assessment of controllable expenses and affords us the ability to make decisions that facilitate meeting our current financial and liquidity goals as well as to achieve optimal financial performance.  It provides an indicator for us to determine if we need to make adjustments to our current spending decisions.

This metric measures our overall liquidity based on operational factors that we can influence in the short term, namely the cost structure or expenses of the organization.  CFFO is one of the metrics used by us and our board of directors:  (i) to review our ability to service our outstanding indebtedness (including our credit facilities and long-term leases); (ii) to assess our ability to make regular recurring routine capital expenditures to maintain and improve our communities on a period-to-period basis; (iii) for planning purposes, including preparation of our annual budget; (iv) in setting various covenants in our credit agreements; and (v) in determining levels of executive compensation.

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Limitations of Cash From Facility Operations

CFFO has limitations as an analytical tool.  It should not be viewed in isolation or as a substitute for GAAP measures of cash flows from operating activities.  CFFO does not represent cash available for discretionary expenditures, since we may have mandatory debt service requirements or other non-discretionary expenditures not reflected in the measure.

We believe CFFO is useful to investors because it assists in their ability to meaningfully evaluate (1) our ability to service our outstanding indebtedness, including our credit facilities and capital and financing leases, and (2) our ability to make regular recurring routine capital expenditures to maintain and improve our communities.

CFFO is not an alternative to cash flows provided by or used in operating activities as calculated and presented in accordance with GAAP.  You should not rely on CFFO as a substitute for any such GAAP financial measure.  We strongly urge you to review the reconciliation of GAAP net cash provided by operating activities to CFFO, along with our condensed consolidated financial statements included herein.  We also strongly urge you not to rely on any single financial measure to evaluate our business.  In addition, because CFFO is not a measure of financial performance under GAAP and is susceptible to varying calculations, the CFFO measure as presented in this report may differ from and may not be comparable to similarly titled measures used by other companies.

The following table shows the reconciliation of net cash provided by (used in) operating activities to CFFO for the periods indicated (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Net cash provided by operating activities	$	42,105		$	46,283		$	110,621		$	63,753
Changes in operating assets and liabilities, net		(14,467	)		(30,025	)		(31,740	)		(10,232	)
Contract buyout costs (Note 4)		–			–			–			6,256
Repayment of capital lease and financing obligations		(4,373	)		(3,558	)		(12,450	)		(10,456	)
Recurring capital expenditures		(6,471	)		(5,000	)		(14,644	)		(13,632	)
Distributions from unconsolidated joint ventures		929			113			1,016			1,464
Cash From Facility Operations		17,723			7,813			52,803			37,153
Self-insurance reserve adjustments, prior years		190			8,605			2,436			11,778
Cash From Facility Operations, as adjusted	$	17,913		$	16,418		$	55,239		$	48,931

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Item 3.  Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates due to our financing activities and changes in the availability of credit.

Our results of operations are affected by changes in interest rates because of our short-term and long-term borrowings.  As of September 30, 2012, we had approximately $317.3 million of variable rate borrowings based on LIBOR.  Of the total variable rate debt of $317.3 million, $50.7 million varies with LIBOR with no LIBOR floors or ceilings and the weighted average spread over LIBOR was 6.21%.  For every 1% change in LIBOR on this $50.7 million in variable rate debt, annual interest expense will either increase or decrease by $507,000.  As of September 30, 2012, the monthly and 90-day LIBOR was 0.214% and 0.360%, respectively.  In addition, we have variable rate debt of $266.7 million that has LIBOR floors at a weighted average floor of 0.97% and a weighted average spread of 3.59%, for a total weighted average rate of 4.56%.  The LIBOR floors effectively make this debt fixed rate debt as long as LIBOR is less than the 0.97% weighted average floor.  Increases or decreases to LIBOR do not change interest expense on this variable rate debt until LIBOR rises above the floor, and conversely, interest expense does not decrease when LIBOR falls below the floor.  This analysis does not consider changes in the actual level of borrowings or operating lease obligations that may occur subsequent to September 30, 2012.  This analysis also does not consider the effects of the reduced level of overall economic activity that could exist in such an environment, nor does it consider actions that management might be able to take with respect to our financial structure to mitigate the exposure to such a change.

Item 4.  Controls and Procedures

(a)  Evaluation of disclosure controls and procedures.

The Company maintains disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended).  Management, under the supervision and with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness and design of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of September 30, 2012.  Based on that evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of September 30, 2012.

(b)  Changes in internal controls

Management has evaluated the effectiveness of our internal controls through September 30, 2012.  Through our ongoing evaluation process to determine whether any changes occurred in internal control procedures in the third quarter of 2012, management has concluded that there were no such changes that materially affected, or are reasonably likely to materially affect, our controls over financial reporting.

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PART II.  OTHER INFORMATION

Items 2, 3, 4, and 5 are not applicable.

Item 1.  Legal Proceedings

From time to time, we are subject to lawsuits and other disputed matters in the normal course of business, including claims related to general and professional liability.  Accruals for these claims are based upon actuarial and/or estimated exposure, taking into account self-insured retention or deductibles, as applicable.  While the outcome of litigation cannot be predicted and could have a material effect on our financial position, results of operations or liquidity, we do not believe that pending legal proceedings are likely to have any such effect.

Item 1A.  Risk Factors

There were no material changes to risk factors during the second quarter of 2012 from those previously disclosed in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011, which could materially affect our business, financial condition, or future results.  The risks described in our Annual Report on Form 10-K are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, financial condition, and/or operating results.

Item 6.  Exhibits

See Index to Exhibits, which is incorporated by reference.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated:  November 6, 2012	EMERITUS CORPORATION
	(Registrant)
	/s/ Robert C. Bateman
	Robert C. Bateman, Executive Vice President—Finance and Chief Financial Officer

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Index to Exhibits

						Footnote
Number			Description			Number
	10.9	*	Executive Employment Agreements.
				10.9.5	Amended and Restated Employment Agreement, effective as of January 1, 2012, between Emeritus Corporation and its subsidiaries and Granger Cobb.		(1)
	10.42		Documents related to Lease between Ventas Realty and Summerville for 6 communities.
				10.42.4	Lease Combination Agreement and Amendment of Lease dated as of June 29, 2011 by and among Ventas Realty, Limited Partnership and Ventas Fairwood, LLC, as Landlord, and SW Assisted Living, LLC, Summerville at Heritage Place, LLC, Summerville at Barrington Court LLC, Summerville at Roseville Gardens LLC, Summerville 17 LLC, and Summerville at Fairwood Manor, LLC as Tenant.		(2)
				10.42.5	Second Amendment to Master Lease dated as of February 24, 2012 by and among Ventas Realty, Limited Partnership and SW Assisted Living, LLC, Summerville at Heritage Place, LLC, Summerville at Barrington Court LLC, Summerville at Roseville Gardens LLC, Summerville 17 LLC, and Summerville at Fairwood Manor, LLC.		(2)
	10.83		Documents related to Loan between Keycorp Real Estate Capital Markets, Inc. and Emerimand LLC
				10.83.03	Multifamily Loan and Security Agreement between Emerimand LLC and Keycorp Real Estate Capital Markets, Inc.		(3)
				10.83.04	Consolidated, Amended and Restated Multifamily Note between Emerimand and Keycorp Real Estate Capital Markets, Inc.		(3)
	10.93		Documents related to Loan between Midcap Funding VIII, LLC and Emerichip Walla Walla LLC
				10.93.01	Credit and Security Agreement dated as of July 13, 2012 by and among Emerichip Walla Walla LLC and Midcap Funding VIII, LLC		(4)
				10.93.02	Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing dated as of July 31, 2012 by and among Emerichip Walla Walla LLC (Grantor), Stewart Title Guaranty Company (Trustee), and Midcap Funding VIII, LLC (Beneficiary)		(4)
				10.93.03	Term Loan Note in the amount of $6,800,000 dated as of July 13, 2012 among Emerichip Walla Walla LLC (Borrower) and Midcap Funding VIII, LLC (together with its successors and assigns, Lender)		(4)
	31.10		Certification of Periodic Reports
				31.1.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302		(4)
					of the Sarbanes-Oxley Act of 2002 for Granger Cobb dated November 6, 2012.
				31.1.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302		(4)
					of the Sarbanes-Oxley Act of 2002 for Robert C. Bateman dated November 6, 2012.
	32.10		Certification of Periodic Reports
				32.1.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906		(4)
					of the Sarbanes-Oxley Act of 2002 for Granger Cobb dated November 6, 2012.
				32.1.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906		(4)
					of the Sarbanes-Oxley Act of 2002 for Robert C. Bateman dated November 6, 2012.

Footnotes:
*	Indicates a management contract or compensatory plan or arrangement.
(1)	Filed as the indicated Exhibit to Form 8-K filed on January 26, 2012 and incorporated herein by reference.
(2)	Filed as the indicated exhibit to First Quarter Report on Form 10-Q filed on May 4, 2012 and incorporated
	herein by reference.
(3)	Filed as the indicated exhibit to Second Quarter Report on Form 10-Q filed on August 3, 2012 and incorporated
	herein by reference.
(4)	Filed herewith.

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